Business Profitability Versus Social Profitability:
Evaluating Industries with Externalities, The Case of the Casino Industry
By Earl L. Grinols and David B. Mustard
http://www.cba.uiuc.edu/grinols/Scribblings/Casinos-Crime-15SEP00.pdf

Abstract

Casino gambling is a social issue, because in addition to the direct benefits to those who own and use casinos, positive and negative externalities are reaped and borne by those who do not gamble. To correctly assess the total economic impact of casinos, one must distinguish between business profitability and social profitability. This paper provides the most comprehensive framework for addressing the theoretical cost-benefit issues of casinos by grounding cost-benefits analysis on household utility. It also discusses the current state of knowledge about the estimates of both the positive and negative externalities generated by casinos. Last, it corrects many prevalent errors in the debate over the economics of casino gambling.

* Department of Economics, University of Illinois, 1206 S. 6th Street, Champaign, IL 61820
E-mail: grinols@uiuc.edu
** Department of Economics, Terry College of Business, University of Georgia,
528 Brooks Hall, Athens, Georgia 30602. E-mail: mustard@terry.uga.edu.

Highlights

  • At the conclusion of its investigation, the commission recommended a national moratorium on the expansion of gambling and more study of gambling's effects, costs and benefits, before making further decisions about it.
  • Many studies pay a great deal of attention, for example, to estimating the number of direct and indirect jobs that casinos create and to tallying the taxes casinos pay, but do not explain the social value of an additional job or calculate the lost taxes of competing non-casino businesses.
  • For example, the effect of casino gambling on firm profits should be summed over all firms, not just casinos. The increased profits of the casinos should be netted against lost profits of other firms that compete for consumer spending.
  • If casinos temporarily reduced unemployment faster than it would have fallen otherwise, this transitory effect could correctly be counted as a benefit of casinos. However, we know of no study that has made this case.
  • Although casino profits and taxes are highly visible, they are invalid measures of social benefits because they do not adjust for the entire economy for the lost profits and taxes of competing businesses.
  • About 5-15% (of the population) could be termed heavy bettors who gamble twice per week or more. The last 2-5% of the population consists of problem and pathological (P&P) gamblers, who suffer from compulsive gambling disorders, which are expressed when the opportunity to gamble is present and sufficient time has elapsed for the problem to become evident. This group might be in the casino daily, for long periods of time, and at unusual hours. Two-thirds to 80% of gambling revenues come from the 10% of the population that gambles most heavily. (21)
  • According to Equation (5) we need the profits and taxes attributable to casinos minus the reduction in profits and taxes of other business due to casinos. Because profits are a function of market structure and the presence of free entry and exit, if casinos were deregulated, market contestability and free entry of casinos would drive economic profits to zero.
  • In 1998, profits before taxes of all non-financial corporate business in the United States were 13.8% of sales. (24) Assuming that casinos average 30% profit rates before taxes (more than double the normal business rate of profit.)
  • Increasing jobs in one location at the expense of lost jobs in another is not a social benefit.
  • Researchers estimate the social costs of casinos using two methods. The first is through the study of problem and pathological gamblers. The second is through statistical analyses of cost-creating activities such as crime, suicide and bankruptcy.
  • Cost Taxonomy: The most comprehensive analysis of the casino-crime link is Grinols et al. (2000), which evaluated county-level data for seven offenses in every US county over 20 yeas, and controlled for about 50 variables. It concluded that on average, 8-10% of crime in casino counties in 1996 could be attributed to the presence of casino gambling in the county, resulting in costs of $63 per adult annually in these counties.
  • Estimates of the fraud committed by gamblers is $1.3 billion per year(29), or $6.61 per adult annually. (30)
  • Maryland Department of Health and Mental Hygiene (1990) reported that 62% of gamblers in treatment committed illegal acts as a result of their gambling, 80% committed civil offenses and 23% were charged with criminal offenses.
  • Lesieur (1998b) surveyed nearly 400 members of Gamblers Anonymous, 57% of whom admitted stealing to finance their gambling. On average these 400 people stole $135,000 and their total theft was over $30 million. Lesieur (1992) reported on illegal activities and civil fraud engaged in by pathological gamblers to gamble or to pay gambling debts in five samples from hospital inpatients, Veterans Administration and Gamblers Anonymous groups, male prisoners, female prisoners, and a female Gamblers Anonymous sample that includes the white collar crime and other crimes listed in item 1.
  • Business and Employment Costs: These costs include lost productivity on the job, lost time and unemployment: sick days off for gambling, extended lunch hours, leaving early to gamble, and returning late after gambling. Problem and pathological gamblers often impose costs on their employers (in addition to theft or embezzlement discussed in the section on abused dollars below) in the form of an unreliable presence on the job and reduced productivity when present. Between 21 and 36% of problem gamblers in treatment reported losing a job because of their gambling (Lesieur, 1998b).
  • Bankruptcy: SMR Research Corporation. Their studies have suggested, fairly consistently, that more than 20% of compulsive gamblers has filed for bankruptcy as a result of their gambling losses.
  • Suicide: Consistent with this, Phillips et al (1997) found that deaths in Las Vegas were 2.5 times more likely to be a result of suicide than deaths in other comparably sized metropolitan areas.
  • Illness: Among the forms of sickness associated with gambling or affected by it are depression, stress-related illness, chronic or severe headaches, anxiety, moodiness, irritability, intestinal disorders, asthma, cognitive distortions, and cardio-vascular disorders.
  • Social Service Costs: This category of costs includes therapy/treatment costs, unemployment and other social service costs (includes welfare and food stamps).
  • Family Costs: Families of problem and pathological gamblers bear gambling-related costs of divorce, separation, spousal abuse and child neglect.
  • Table 2 shows that the total average social cost of eight studies is $13,586 per pathological gambler per year. If 1.5% of 196.65 million US adults were pathological gamblers, this would imply annual social costs of $40.1 billion or $204 per adult.
  • Based on these lower and upper bounds, annual national social costs from problem and pathological gambling range from $27.5 billion to over $43 billion. On a per adult basis, the numbers range from a low of $140 to a high of $221.
  • What is the Effect of Casinos on the Number and Gambling Patterns of Problem and Pathological Gamblers?
  • There is abundant evidence that increased gambling opportunities increase problem and pathological gambling. For example, the NGISC reported that the presence of a casino within 50 miles roughly doubled the presence of problem and pathological gambling. (41)
  • Other indicators include the tremendous increase in the numbers of gamblers seeking help when casinos enter a market, the increase in gamblers anonymous groups when gambling enters a state, and the evidence from survey data on the number of problem and pathological gamblers before and after casino expansion.
  • An average adult is expected to lose $200-300 each year in casinos if they are nearby, while a typical pathological gambler often loses 10-20 times this amount.
  • The study gives the impression that counties that opened casinos experienced better economic performance than those that did not. We can select other counties that had the same unemployment rate (within 0.1 percentage point) as the casino county in the initial period and compare their performance directly. This is done in Figure 2. A shown there, the unemployment rate dropped in all counties with similar initial unemployment.
  • A statistical test confirms that the drop of unemployment of casino counties is statistically insignificantly different from the drop experienced by the comparable non-casino counties shown in Figure 2.