The Political Economy of Regulating Gambling

Abstract

Gambling² is a range of service products that is regulated in most countries. The purpose of this article is to discuss the political economy of this regulation. Regulation is done for three reasons, of which the first two are difficult to accept for the economist:

• (i) Gambling is often assessed morally as a vice (like liquor, tobacco and cars) that deserves especially high taxes. The moral assessment is often religiously based, and regulation goes back to the Middle Ages.

• (ii) Due to the long history, regulation has a strong path dependency — and it has created stakeholders. If for some reason regulation had to start all over, it would probably be done differently.

• (iii) The rational reason for the special treatment of gambling is that it creates the gambling problem of addiction for a small fraction of the population. The problem is an externality which should be regulated.

Externalities are often difficult to assess empirically, and policy decisions on regulation need macro estimates. The first half of the paper develops a method to assess the aggregate social costs of gambling for a country and actually assesses the numbers for one country (Denmark). This is done in sufficient detail so as to allow others to use the model with data from their own country.

School of Economics and Management (building 1322), University of Aarhus, 8000 Aarhus C, Denmark, Phone: +45 8942 1607 or 08. E-mail: mpaldam@econ.au.dk. http://www.martin.paldam.dk.

I am grateful to Matti Viren for discussions of this fascinating subject, and for a long conversation with Michael Bay Jørsel, who heads the largest rehabilitation institution for compulsive gambling in the country, and for assistance from Gunnar Viby Mogensen. Also, I have benefited much from a day of discussions at the EL2007 meeting in Budapest.