A Violation of Dominance and the Consumption Value of Gambling

We document an apparently widespread violation of dominance in the horseracing betting market in the United Kingdom, and use the systematic variation in the incidence of this violation to estimate the consumption value of gambling. Gamblers in the UK face a tax on gambling of 10%, but have the choice of paying the tax either at the time of wager, or on any return on a successful bet. It can be shown, however, that the latter act is strictly dominated by another action in which tax is paid on the wager. We explore the hypothesis that this apparent violation of rationality may be explained by a component of utility which represents the consumption value of gambling, which in turn varies with the amount wagered. We then estimate this component from a dataset consisting of a record of 25,000 individual bets using probit analysis of the tax decision