Testing for Efficiency in Lotto Markets

Abstract

State‐sponsored lotto games, because they are pari‐mutuel and because jackpots with no winner are rolled over into the next drawing, present an excellent opportunity to test for market efficiency. Using data from Massachusetts, Kentucky, and Ohio, we investigate bettors' responses and test for weak‐form efficiency. Lotto bets do not have positive net expected returns, thus weak‐form efficiency exists. To evaluate strong‐form efficiency we utilize the concept of a rational expectations equilibrium. We find that in general lotto bettors' decisions to play generate a level of sales that conform to their original forecasts of expected value.

Dueling Jackpots: Are Competing Lotto Games Complements or Substitutes?

“…This reflects the growing excitement about large jackpots relative to smaller ones. 2 BAdvertised jackpot^and Badvertised jackpot squared^have been included in past academic articles, such as DeBoer [1990], Shapira and Venezia [1992], Gulley and Scott [1993], Scott and Gulley [1995], Matheson [2001], and Forrest et al [2002] as primary explanatory variables for a lottery draw's sales.…”

Buying a Dream: Alternative Models of Demand for Lotto

“…Wessberg (1999) finds that, in the 1990s, world lottery sales grew by 9% on average and some values of the highest prize (the jackpot) exceeded US $20 million in Italy, Spain, and the United Kingdom with comparable levels for state lotteries in the United States. Cook and Clotfelter (1993), Gulley and Scott (1993), Scott and Gulley (1995), Walker (1998), , Purfield and Waldron (1999) and Forrest et al (2000b) all follow this approach. Over time, an increasing number of state and national governments have * Several economists have attempted to model lotto demand.…”

Scale economies of lotto once more

“…The average player's net payoff can never be positive in the absence of a rollover and, in fact, has not been positive even in the presence of a rollover (Scott and Gulley, 1995). It is also believed to offer the most skewed payoff, given the long odds at which a sizeable jackpot is promised, and it is probably to skewness it owes its popularity (Golec and Tamarkin, 1998;Garrett and Sobel 1999).…”