The economics of American lotteries

ON APRIL 1st, viewers across the nation witnessed six numbered ping-pong balls emerging from a giant popcorn popper. This marked the latest drawing of Powerball, a popular multi-state lottery. The recent draw featured a staggering $1 billion jackpot, ranking as the fifth-largest in the game’s 32-year history.

Although the odds of winning the jackpot are considerably slim—just one in 292 million for Powerball—the sales have soared to unprecedented levels. In 2023, Americans collectively spent over $100 billion on state-administered lotteries (refer to chart 1). If combined, American lotteries would rank as the ninth-most profitable entity in the nation.

The popularity of lotteries persists despite the daunting odds. Factors contributing to their appeal include widespread availability across 45 states and the District of Columbia, affordable ticket prices, and the allure of massive jackpots. Additionally, a portion of the proceeds supports various commendable causes such as public education and programs for the elderly. On average, state lotteries retain around 30% of ticket sales, a significantly higher percentage than casinos retain from slot machine bets.

However, the lottery system exhibits a stark regressive nature. Analysis of data obtained by The Economist through public records reveals that lower-income households spend noticeably more in absolute terms on lotteries than their wealthier counterparts (see chart 2). The disparity becomes more pronounced when viewed as a proportion of income. Based on sales data from 24 states at the zip-code level, a 10% decline in median household income correlates with a 4% increase in lottery expenditures. Additionally, age and ethnicity influence lottery participation, with older and non-white Americans showing higher engagement, though income remains the primary determining factor.

In zip codes with lottery retailers falling within the poorest 1%, the average adult spends approximately $600 yearly, equating to nearly 5% of their income, on lottery tickets. In sharp contrast, those in the wealthiest 1% of zip codes spend just $150, representing a mere 0.15% of their income. This translates to the poorest households allocating roughly 30 times more of their income to lotteries compared to their wealthier counterparts. Moreover, the pandemic seems to have exacerbated these financial imbalances, with the poorest 1% of households spending $100 more on lotteries in 2021, fueled by stimulus checks, while the richest 1% increased their spending by just $10.

As for the recent Powerball jackpot drawing on April 1st, while six ticket-holders secured $1 million each by matching the first five winning numbers, the top prize remained unclaimed. The subsequent Powerball draw is set for April 3rd, with the jackpot reaching $1.09 billion.■