Academic journal article Contemporary Economic Policy

The Impact of Casino Gambling on Personal Bankruptcy Filing Rates

Academic journal article Contemporary Economic Policy

The Impact of Casino Gambling on Personal Bankruptcy Filing Rates

Article excerpt

I. INTRODUCTION

Personal bankruptcies soared in the United States between 1994 and 1998. Nearly 1.4 million U.S. households filed for bankruptcy protection in 1998, about a half million more than in 1995. Bankruptcy filings declined about 8% in 1999 to 1.28 million, but the level was still dramatically higher than at the beginning of the decade (see Figure 1). Why this occurred against the backdrop of the most favorable economic conditions in a half-century has challenged researchers and even spurred Congress to introduce legislative remedies.

Gropp et al. (1997) illustrated the standard explanation for personal bankruptcy: Each period households gain new information on current and projected future income as well as current and projected future expenses and update their wealth and implied projected future path of consumption with and without bankruptcy. (1) In such a setting, the bankruptcy choice can be triggered by "insolvency events" that reduce wealth, such as the realization of reduced income arising from a layoff, or high expenses arising from a divorce or an uninsured illness or accident. These changes can create a financial crisis for which bankruptcy becomes the borrower's best alternative.

Debtor surveys consistently find that the majority of bankruptcies are triggered by insolvency events, although an explanation for the rise in personal bankruptcies during the mid-1990s that is built around a comparable rise in insolvency events seems inconsistent with the marked improvement in the economic climate. (2) However, one activity that can precipitate personal financial crises--and that has also experienced growth as dramatic as personal bankruptcies over the past decade--is commercial gambling, especially casino gambling. This article empirically examines whether casino gambling is associated with higher bankruptcy filing rates in counties hosting or near casinos.

Section II describes the growth in casino gambling in the United States and its geographic spread, especially over the past two decades. The section also reviews prior research on the linkage between the opening of casinos and the incidence of personal bankruptcies. Section III develops a simple model of the bankruptcy filing choice to help identify key factors that affect the likelihood that a household will file for bankruptcy. Based on this theory, section IV describes various variables constructed to estimate an empirical model of bankruptcy filing rates at the county level for over 3000 U.S. counties for the period 1993 through 1999. The model includes a variable that measures the extent of casino gambling activity for those counties hosting and adjacent to casino facilities. Section V discusses the estimation results, and section VI provides concluding remarks.

II. PRIOR RESEARCH ON THE IMPACT OF CASINO GROWTH ON PERSONAL FINANCES (3)

Consumer spending on all forms of commercial gambling in the U.S. reached a then record $54.3 billion in 1998, up from $39.8 billion as recently as 1994. Gaming industry analysts refer to consumer spending on gambling more precisely as adjusted gross revenue (AGR), defined as gross dollars wagered minus the dollars casinos pay out in the form of winnings. Table 1 displays recent growth trends in AGR by gaming category and highlights the importance of casino gambling as the primary driver underlying the growth in gross gambling revenue. Casino gambling accounted for 56% of AGR in 1998. Figure 2 provides more detail on the breakdown of revenue by gambling category.

These statistics are striking considering that prior to 1989 the only casinos in the United States were located in Nevada and in New Jersey. National, and especially state legislative activity propelled the expansion of casino gambling across the country in the late 1980s and early 1990s. In October 1988, Congress passed the Indian Gaming Regulatory Act, permitting casino gambling on Native American land. …

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