A small state seeking to increase per capita lotto sales has several options. First, it could increase the fraction of the handle going into the jackpot. However, the regression estimate of the "jackpot elasticity of demand" in Massachusetts suggests that the additional betting engendered by this ploy will not cover the cost. Second, the state could seek to mimic the game offered by a larger state by guaranteeing a large minimum jackpot while changing the format to produce a corresponding reduction in the probability of winning. This ploy would surely fail, however, because the game would lose credibility after going many weeks without a winner. Third, the state could join with other states to increase the population base for the game, and that is what a number of small states have done. The scale effect evident in lotto forms an interesting contrast to the scale effect in insurance markets. In insurance, increasing the scale reduces the investment risk. In lotto, increasing the scale provides a more risky instrument. In both cases, bigger is better.
My Research