Ongoing Challenges in Cost-Benefit Analysis of Casino Gambling

1. Ongoing Challenges in Cost-Benefit Analysis of Casino Gambling Colloquium on the European and National Perspectives of the Regulation of Gambling Tilburg University, The Netherlands 23 November 2006 Douglas M. Walker, Ph.D.

2. Gambling research in the U.S. • Since casino gambling began expanding outside Nevada and New Jersey in the early 1990s, gambling research has increased. • Politicians are interested in benefits relative to costs of legalization. • Casino legalization is a state-level policy. • State governments have been facing record-level budget deficits. • Gambling research has been influential, as it is commonly referred to by politicians and the media. Walker, Tilburg Colloquium

3. The economics of gambling literature • Some well-known studies include… • U.S. House of Representatives (hearing, 1994), • National Gambling Impact Study Commission (NGISC 1999) • Australian Productivity Commission (APC 1999) • National Opinion Research Center (NORC 1999) • National Research Council’s Pathological Gambling: A Critical Review (1999) Walker, Tilburg Colloquium

4. Gambling literature, cont. • Earlier studies: these are mostly not peer-reviewed, and use arbitrary assumptions. • Politzer et al. (1985) • Maryland Task Force (1990) • “Casinos in Florida” (1995) • Goodman (1994a, 1995b) • Grinols and Omorov (1996), Grinols (1994a, 1995a) • Kindt (1994, 1995) • Thompson, Gazel, and Rickman (1996, 1997, 1999) Walker, Tilburg Colloquium

5. Gambling literature, cont. • More recent studies, but still flawed: • Thompson and Quinn (2000) • Managerial and Decision Economics (2001), edited by Grinols and Mustard • Grinols and Mustard • Gazel, Rickman, and Thompson • Kindt • Comments on Kindt’s paper published, MDE 2004 • Grinols (2004) • perhaps most influential Walker, Tilburg Colloquium

6. Gambling literature, cont. • Thompson and Schwer (2003/2005) • Study of Las Vegas that got publicity • Methodology by Thompson et al. (1996) • Hall Aitken (2006) • Study of U.K. • PolicyAnalytics (2006) • Study of Indiana, with a focus on crime • Relies on Grinols (2004) • Grinols and Mustard (2006) • Review of Economics and Statistics study on crime Walker, Tilburg Colloquium

7. Gambling literature, cont. • Research in this area has been criticized by… • National Research Council (1999) • Walker and Barnett (1999 • Shaffer et al. (2001) • Federal Reserve Bank of Minneapolis (2003) • Eadington (2004) • Walker (2007) • …and elsewhere Walker, Tilburg Colloquium

8. Economic perspective • Economic perspective on costs-benefits • Represented by Collins and Lapsley (2003), Eadington (2003), and Walker and Barnett (1999). • This perspective has a foundation in the economics literature. • Detailed description in Walker (2007) Walker, Tilburg Colloquium

9. Economic perspective on benefits • The benefits of legalized casino gambling include… • Tax revenues (transfers, but easy to avoid) • Employment and wage effects • Capital and labor inflow to a region • Potential economic growth • Walker and Jackson (1998, 2007) • Consumer benefits (CS, variety benefits, competitive pressure on entertainment) • This is the most commonly ignored benefit. • Consumer sovereignty • Some may argue that increased freedom of choice is, itself a benefit. Walker, Tilburg Colloquium

10. Benefits, cont. • There have been relatively few academic studies of the benefits of gambling. • However, these are arguably easier to measure than the costs. • Politicians may care mostly about tax revenues, and so do not demand detailed studies of benefits. • The most important benefits (CS, other consumer benefits) are most difficult to measure. Walker, Tilburg Colloquium

11. Economic perspective on costs • There is debate over all aspects of the costs of gambling • definition • measurement • Social cost is a “decrease in aggregate societal wealth” (Walker and Barnett, 1999). • Wealth need not be in monetary terms; it is utility. • Transfers of wealth are not social costs. • Private (internalized) costs are omitted. • Most researchers agree that the costs are caused by pathological gamblers. • There are different severities of the affliction, ignored here • Compulsive, pathological, problem gamblers, etc. Walker, Tilburg Colloquium

12. Costs, cont. • Even if the definition is conceptually valid, measurement is difficult, if not impossible. • There is no agreement among researchers from different disciplines. • Other social scientists do not like the exclusion of transfers and other private costs. Walker, Tilburg Colloquium

13. Why the focus on costs? • Costs are typically the focus by media, politicians, and researchers. • This may be a result of the existing illegal status of casinos: • “Are the benefits of legalization/expansion worth the costs?” • Estimates of expected tax revenues, employment increases, and changes in average wages can be easily produced. • The social/economic costs are more elusive, both in defining them and in measuring them. • Costs are closely related to prevalence of pathological gambling. Walker, Tilburg Colloquium

14. Calculating social costs • Most of cost studies use this formula: estimated annual cost per pathological gambler X prevalence estimate (%) X population estimate = estimated annual social cost of gambling Walker, Tilburg Colloquium

15. Variation in cost estimates • Authors rarely define “social cost” before estimating it. • Studies use ad hoc methodologies, resulting in cost estimates ranging from US$9,000-50,000 (€7.000-39.000) per pathological gambler per year. • Such a large range indicates that the methodologies are not the same. Walker, Tilburg Colloquium

16. Examples of problematic studies, discussed hereafter • Grinols (2004) • Politzer et al. (1985) • Thompson et al. (1996, 1997, 1999) • Thompson and Quinn (2000) • Thompson and Schwer (2003) • Grinols and Mustard (2006) Walker, Tilburg Colloquium

17. Grinols (2004) • Gambling in America demonstrates many of the problems in the literature. • His discussion appears to be comprehensive and unbiased, but it is neither. • He ignores work with which he disagrees. • See Eadington (2004) for a discussion. • He overstates the costs and discounts the potential benefits from gambling. Walker, Tilburg Colloquium

18. Grinols (2004), cont. • Grinols estimates for the U.S.: • Annual cost to society of one pathological gambler: $10,330. • Annual cost per problemgambler: $2,945. • On a “per adult” basis, the average cost is estimated to be $219. (p. 175) • After some analysis, it is clear that these estimates are meaningless. Walker, Tilburg Colloquium

19. Grinols (2004), cont. • Cost estimates were “derived by averaging over the available [“original”] studies for each category of social cost, adjusting to 2003 dollars, and summing over cost types” (p. 176). • The studies used by Grinols to derive his cost estimates include… • 9 studies, none peer-reviewed. Walker, Tilburg Colloquium

20. Grinols (2004), cont. • Grinols’ estimate is based (in part) on… • Politzer et al. (1981) • Thompson et al. (1996) • Thompson and Quinn (1999/2000) • Thompson and Schwer (2003) • These studies have been criticized by a number of researchers. Walker, Tilburg Colloquium

21. Grinols (2004), cont. • Grinols ignores the controversy over how to define and estimate social costs. • His presentation gives the impression that because the cited research is “original” it is legitimate. • He does not explain differences in the studies or their potential flaws. • Let’s look at some aspects of the studies used by Grinols… Walker, Tilburg Colloquium

22. Define “abused dollars”: [the] amount [of money] obtained legally and/or illegally by the pathological gambler which otherwise would have been used by the pathological gambler, his family, or his victims for other essential purposes. These abused dollars include earned income put at risk in gambling, borrowed, and/or illegally obtained dollars spent on basic needs and/or provided to the family which otherwise would have been “covered” by that fraction of earned income which was used for gambling, and borrowed and/or illegally obtained dollars for the partial payment of gambling related debts. This concept is vague. What is an “essential purpose”? Is it defined the same for Bill Gates and Joe Sikzpak? Could be interpreted as the total bets placed (handle), much larger than actual losses. Any money borrowed to gambler is considered “abused dollars.” Use of this concept allows one to arrive at a very high social cost estimate. Politzer et al. (1985) Walker, Tilburg Colloquium

23. Thompson et al. (1997) • Estimated social cost per compulsive gambler is $9,469 (p. 87), but… • They do not define “social cost,” and include whatever negative effects they can measure with their survey on Gamblers Anonymous (GA) members. • Using GA members in Las Vegas to is not a random sample of problem gamblers. • Most of the “costs” are transfers. Walker, Tilburg Colloquium

24. Thompson et al. (1997), cont. • Costs included… • Employment (lost work hours, unemployment compensation, lost productivity), $2941 • (Lost hours, productivity are internalized; unemployment compensation is a transfer or “fiscal externality.”) • Bad debts, $1487 • (Transfer of wealth) • Civil court costs (bankruptcy, other), $848 • Criminal justice (theft, arrests, trials, probation, incarceration), $3498 • (Thefts are transfers) • Therapy, $361 • Welfare, $334 (Transfer of wealth) • TOTAL: $9469 • (Revised to $2974 after eliminating transfers and internalized costs. [Walker and Barnett 1999]) Walker, Tilburg Colloquium

25. Thompson and Quinn (2000) • Costs include money leaving South Carolina for purchase of video poker machines ($46.5 million each year). • Then any purchase represents a social cost? • Money leaving the state is not a cost since the buyer values what is bought more than the money spent. • A transaction at the grocery store is similar. Walker, Tilburg Colloquium

26. Thompson and Schwer (2003) • They estimate the annual social cost of per pathological gambler in Las Vegas at $19,085. • Accounting for estimated prevalence and population, the total annual cost estimate is between $301 and 470 million. • Their cost figure is the result of numerous arbitrary assumptions. • We’ll examine a component of this estimate later… Walker, Tilburg Colloquium

27. Studies cited by Grinols (2004) • Among the studies cited by Grinols, there is… • Disagreement about the types of costs to include • Sometimes costs are excluded because of measurement difficulties. • Disagreements on the estimated values of the individual cost categories • The estimated values are often the result of arbitrary assumptions (see Walker 2003) Walker, Tilburg Colloquium

28. Adjudication costs (criminal and civil justice) • The monetary estimates for these costs among the Grinols-cited studies are: • $3,619 (Maryland, Politzer et al. 1981) • $733 (Wisconsin, Thompson et al. 1996) • $568 (Conn., Thompson et al. 1998) • $31 (S. Dakota, 1999) • $420 (Louisiana, Ryan et al. 1999) • $266 (S. Carolina, Thompson and Quinn 2000) • $51 (Nevada, Thompson and Schwer 2003) • Such a huge variation across states indicates these studies are not measuring the same thing the same way. Walker, Tilburg Colloquium

29. Thompson and Schwer (2003) cost estimate for “lost work time” • 50 of 89 (or 56%) of Gamblers Anonymous survey respondents indicated they had missed work because of gambling. • An average of 17.22 hours missed during each month due to gambling. • The average loss is 9.67 hours/month allocated over the 89 respondents. • This amounts to 116.1 hours per year, calculated [(50 x 17.22)/89] x 12 • 116.1 hours is multiplied by $15/hr, the hourly rate based on Thompson et al.’s (1996) use of an average annual pay rate of $23,610. • This annual rate of $23,610 is based on the U.S. average salary (Thompson et al. 1996, p. 17). • This results in an estimated cost of $1,742 for lost work time. Walker, Tilburg Colloquium

30. Grinols and Mustard (2006) • This recent paper in Review of Economics and Statistics has numerous problems • In calculating crime rates, they include crimes committed by visitors, but omit visitors from the measure of population at risk. • Their estimate of costs of crime seems arbitrary. • Other issues are discussed in Walker (2007) Walker, Tilburg Colloquium

31. General Problems in Estimating Social Costs of Gambling • Regardless of the definition of “social costs” chosen, there are measurement problems… • Counterfactual scenario • Comorbidity • Survey data and fungible budgets • Government expenditures • If a particular study does not address these, it should probably be ignored. Walker, Tilburg Colloquium

32. Counterfactual scenario • For policy purposes, the economic and social effects of legalized casinos must be compared to the case in which casinos are not legal. • This may be difficult to know in terms of employment, economic growth, etc. • Unless the counterfactual is what is already happening… • In some stagnant economies, one could argue that no other industry would have come (e.g., Mississippi Gulf Coast). Walker, Tilburg Colloquium

33. Counterfactual scenario, cont. • In terms of problem/pathological gambling… • If casinos were not legal in the state, would people just go to other venues? • If casinos were not available, would the pathological gamblers with coexisting disorders have more serious alcohol or drug problems? • If yes, then it is possible that the gambling legalization would lead to lower social costs even if more people would become pathological gamblers. Walker, Tilburg Colloquium

34. Comorbidity • This may be the biggest problem in cost-benefit analysis. • Studies have found that many pathological gamblers have other disorders. • Petry, Stinson, and Grant (2005, p. 569) find: • 74.2% have alcohol use disorders • 38.1% have drug use disorders • 41.3% have anxiety disorders • 28.5% have obsessive-compulsive personality disorder • How do you allocate the “social costs” to the different problems when many pathological gamblers have other disorders? • Most of the published studies ignore this, resulting in overestimates of the social costs attributable to gambling. Walker, Tilburg Colloquium

35. Surveys and fungible budgets • Diagnostic instruments and cost estimate surveys ask various questions about potential problem gamblers’ behavior. • Blaszczynski et al. (2006) explain that without explicit instructions, respondents use different strategies in estimating their gambling losses. • The result may be serious biases in gambling losses reported in the literature (p. 128). • Walker (2007) discusses the inability to attribute specific expenditures to specific revenue sources. • Budgets are fungible. Walker, Tilburg Colloquium

36. DSM-IV and SOGS criteria • DSM-IV items • 8. “…has committed illegal acts such as forgery, fraud, theft, or embezzlement to finance gambling.” • If a person cannot estimate gambling losses, can they correctly attribute their crimes to its cause? • 10. “…relies on others to provide money to relieve a desperate financial situation caused by gambling.” • What if the person bought an expensive car, or is otherwise financially irresponsible? • How do clinicians deal with this possibility? Walker, Tilburg Colloquium

37. DSM-IV and SOGS criteria, cont. • SOGS items • 14. “Have you ever borrowed from someone and not paid them back as a result of your gambling?” • What if you dine out at fine restaurants too often? Will you attribute your financial problems to the proper cause? • 16a-k. “If you borrowed money to gamble or pay gambling debts, who or where did you borrow from?” (many possible responses) • How can a person attribute specific spending to specific sources of income, unless there is only one source of income? Walker, Tilburg Colloquium

38. Caveat • Clinicians may argue that it does not matter whether it is possible to identify sources of spending. The screening instruments may serve their purpose anyway. • Perhaps what matters is if the person thinks he/she has a problem. Walker, Tilburg Colloquium

39. Relevance of diagnostic tools to cost estimates • The reason these types of questions are relevant to policy is that the questions about total losses and sources of money used to gamble are used in cost estimation studies. • Abused dollars • Bad debts • Bailout costs • Bankruptcy costs Walker, Tilburg Colloquium

40. “Fiscal externalities” • Browning (1999) discusses how to handle costs of government policies. • His application is to health care costs associated with smoking. • Walker (2007) discusses this in the context of treatment of pathological gambling. Walker, Tilburg Colloquium

41. “Fiscal externalities” (cont.) • The issue is how to classify costs of government for pathological gambling behavior. • Is the monetary cost incurred by government a cost of pathological gambling, or a cost of our philosophy on government and policy? • Suppose one country has very generous treatment reimbursement (150%), while another country’s government pays only 50% of the costs. • The “social cost” of the first country would be triple that of the second. Walker, Tilburg Colloquium

42. “Fiscal externalities”, cont. • If government expenditures are “social costs,” then we can eliminate costs by eliminating spending. • Obviously this isn’t the correct way to think about social costs. Walker, Tilburg Colloquium

43. Critiques of C-B Analyses • Reuter (1999) and Kleiman (1999) are enlightening. • They argue that research effort would be better spent on the effects of policy changes. • Applied to gambling, since gambling is already widely available, what can we do to minimize the costs/harms? • This is similar to what public health perspectives advocate – harm minimization. Walker, Tilburg Colloquium

44. Should we measure costs and benefits of casinos? • There are motivations for this type of research… • Politicians need data to inform and defend their decisions. • “Policy entrepreneurs” want to influence policy (Krugman 1996) • Researchers benefit if there is a problem to investigate. • But do cost-benefit studies provide good information? And are they important? • Policymakers might make better decisions without such studies. Walker, Tilburg Colloquium

45. Should we measure costs and benefits of casinos? (cont.) • Peter Collins’ book, Gambling and the public interest (2003) has an excellent discussion on this issue. • Policy discussions in the U.S. neglect the fundamental issues… • Property rights • Freedom of choice/consumer sovereignty • The role of government in a free society • We instead focus on expected tax benefits compared to a murky understanding of “social costs.” Walker, Tilburg Colloquium

46. Conclusions • Unfortunately, researchers have not developed valid or practical methods for estimating costs (and benefits) of casino gambling. • Given that some researchers seem intent on influencing policy, as explained by Eadington (2004), perhaps we should focus more on the more basic issues of property rights, freedom of choice, and the proper role of government. • At this stage in the development of research in this area, policymakers are advised not to put too much stock in existing studies. • If one does rely on such studies, seek an external critique of the study to be aware of potential problems that may not be explicitly identified in the study. Walker, Tilburg Colloquium

47. Contact information The Economics of Casino Gambling by Doug Walker Springer (Jan. 2007) ISBN 3-540-35102-7 Doug Walker Associate Professor of Economics Georgia College, CBX 14 Milledgeville, GA 31061 USA dougwalker1@gmail.com http://walker-research.gcsu.edu (This link has presentation slides and references from the presentation.) Walker, Tilburg Colloquium