Academic journal article Economic Inquiry

Education's Gambling Problem: Earmarked Lottery Revenues and Charitable Donations to Education

Academic journal article Economic Inquiry

Education's Gambling Problem: Earmarked Lottery Revenues and Charitable Donations to Education

Article excerpt


Over the past several decades, state governments in the United States have come to embrace lotteries as an alternative source of revenue. Lotteries have proven to be successful in raising revenue; on average, lotteries add nearly 500 million dollars to each state's budgets yearly. (1) While a handful of states add lottery revenue to their general funds, states typically earmark the revenue to support particular public goods. States adopt lotteries with the intention of funding causes as diverse as environmental protection, the arts, and support for their elderly, but most commonly lottery funds are earmarked for education. Twenty of the 43 states that currently sponsor lotteries direct all of their revenues toward education, while several more dedicate at least some fraction to education. However, existing research suggests that, at best, education earmarking fails to increase education funding by the promised amount (Evans and Zhang 2007; Novarro 2005); at worst, total education funding either remains constant (Garrett 2001; Spindler 1995) or falls with the introduction of a lottery (Borg, Mason, and Shapiro 1991; Erekson et al. 2002).

Even if earmarked lottery revenues do not increase government's contribution to the intended public good, government of course is not the only source of funding for many public goods. In most cases, the causes supported by state lotteries also benefit from and rely on charitable contributions. This is especially true of education. In aggregate, education-related organizations consistently receive more donations than any other secular cause in the United States. Americans donated a total of 38.87 billion dollars toward education in 2011, which is roughly twice the amount of money that was raised through state lotteries in the same year. (2) An examination of government expenditures alone therefore does not capture the full impact that a lottery has on public good provision, as the lottery may also affect charitable contributions.

With this in mind, I examine the impact of the introduction of education lotteries on private donations. Standard models of public good provision suggest that if an individual's utility depends at least in part on the overall level of the public good, then government spending serves as a substitute for charitable contributions (Andreoni 1989; Bergstrom, Blume, and Varian 1986). Thus, we should expect charitable contributions to decrease with an increase in government spending. If, on the other hand, donors are motivated entirely by "warm glow" or the joy of giving, then government spending is not a good substitute for one's own donation and should therefore have no impact on donations. Numerous empirical tests have generally found some drop in giving, though the magnitude of the crowd-out is typically small. (3) If donors respond to the announced increase in government funding associated with the introduction of a lottery, then this--combined with the fungibility of lottery revenue--may imply that lotteries lead to a decrease in total provision.

I assess the degree to which lottery revenue impacts donors' contributions using several individual-level surveys: Center on Philanthropy Panel Study (COPPS), Giving and Volunteering Survey (GVS). (4) Collectively, these surveys span from 1989 to 2008, so all of the analysis in the paper focuses on this time period. All of these surveys ask respondents to indicate how much money they have donated recently to a variety of causes, including education. In a difference-in-differences (DID) framework I compare the level of education-related donations before and after a state has introduced an education-funding lottery. I find a significant decrease in education giving when an education lottery is introduced.

I then address why contributions fall in this context. In doing so, I speak to more general questions in the literature on donors' motivations and response to government activity. …

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