Vice Squad
Sunday, October 14, 2007
State "Sales" of Lotteries

Last week Vice Squad noted a new series of articles from the New York Times on state lotteries. Today brought the second installment in the series, this one focusing on the possibility that states will sell (actually, in all likelihood, lease long-term) their lottery operations to private companies. The article details the extent to which these privatizations are being pushed by Wall Street investment banks, which figure to make out big-time in the course of lottery lease deals. Newcomers to politics will be surprised to learn that some of the representatives of the Wall Street firms that are highlighting privatization are, coincidentally, former high-ranking government officials, sometimes in the very states they are targeting.

The problem, of course, is that the lotteries are worth more (and the fees for the deals are commensurately higher) the more revenues that they can generate in the future. But as with all vices, revenue maximization alone does not conduce to the public welfare. The Times quotes Vice Squad regular Phil Cook: “'In principle, it’s possible to regulate the lottery, even if it’s privately run,' he says. 'But that’s going to require sustained will power on the part of state governments, and whether they are going to have that in practice is an open question.'”

There are two points that aren't really brought up in the Times article, but which I think are important. First, people tire of lotteries, and so maintaining or increasing revenues in the long-run requires the introduction of new games, new forms of ticket distribution, and innovative marketing angles; how these issues will be handled will be key to the social and revenue effects of any long-term privatization. Second, the length of the lease is obviously of paramount importance. I think that there is something to be said for short-term leases, on the order of the seven-to-ten years that have been employed in Britain. These relatively short lease terms mean that private lottery operators will be leery of conducting their operations in ways that raise public concerns, because visible problems would make it less likely that the same firm would be awarded a renewal when the original lease expires.

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