Better State Lotteries

Abstract

Over the last three decades, a little-noted change has taken place in state lotteries. This change is an increase in the average payout rate, the share of sales that is returned to players in the form of prizes. Because it reduces the rate of implicit taxation on lottery purchases and its accompanying welfare loss, this change has inadvertently made lotteries better, or at least less objectionable. This paper reviews the normative case for reducing the implied tax, documents the rise in payout rates across the United States, offers an explanation for that rise, notes the starring role played by instant games, illustrates its effect on the regressivity of lottery finance, and documents the surprising correlation between the price of instant games and their payout rates.