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Lottery Competition, Efficient Rent Seeking Papers

2 min readBy: Justin Higginbottom

A couple of interesting and recent NBER papers that have taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. related themes:

One from economists Brian G. Knight and Nathan Schiff called “Spatial Competition and Cross-border Shopping: Evidence from State Lotteries” reports on competition between state lotteries:

“We first develop a simple theoretical model in which consumers choose between state lotteries and face a trade-off between travel costs and the price of a fair gamble, which is declining in the size of the jackpot and the odds of winning. Given this trade-off, the model predicts that per-resident sales should be more responsive to prices in small states with densely populated borders, relative to large states with sparsely populated borders…. The empirical results support the predictions of the model.”

So even with a state monopoly on lotteries, there is competition between neighboring states so that the “best” lotteries will likely be in areas with good access to another state’s lottery. From the conclusion:

“Even more generally, our results have important implications for the taxation of other products with low transportation costs and significant variation in tax burdens across states. As noted in the literature review, this set of products includes gasoline, cigarettes, and alcohol. In these cases, our analysis suggests that tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. s are linked across states and thus changes in tax rates in one state may a affect tax revenues in neighboring states.”

Another paper by MIT economist Daron Acemoglu titled “Institutions, Factor Prices and Taxation: Virtues of Strong States?” talks about the pros and cons of efficient state theft. From the conclusion:

“Many of the most pernicious economic institutions and policies create entry barriers or manipulate factor prices indirectly to transfer resources from entrepreneurs and workers to groups that hold political power. These inefficiencies partly result from the fact that direct and efficient fiscal instruments to transfer resources from the former to the latter groups are absent. This reasoning suggests that increasing state capacity and expanding the set of available fiscal instruments should redress (some of) these inefficiencies and induce a better allocation of resources.

This paper points out why this argument needs to be qualified and why caution is necessary before increasing the fiscal capacity of the state becomes a silver bullet policy recommendation. Because the availability of more efficient means of taxation increases the potential benefits of controlling state power, it also intensifies political conflict aimed at capturing the control of the state. This indirect effect counteracts the benefits from more efficient taxation and may dominate these direct benefits; as a consequence, the allocation of resources may deteriorate when the society and the state have access to additional fiscal instruments.”