Essays on public policy and consumer choice : applications to welfare reform and state lotteries

This thesis investigates individual decision-making in response to government policies, in particular, state lotteries and the welfare "family cap." Despite considerable controversy surrounding the use of state lotteries as a means of public finance, little is known about their consumer consequences. Chapter one investigates two central questions about state lotteries and consumer behavior. First, do state lotteries primarily crowd out other forms of gambling, or do they crowd out non-gambling consumption? Second, does consumer demand for lottery games respond to expected returns, as maximizing behavior predicts, or do consumers appear to be misinformed about the risks and returns of lottery gambles? Analyses of multiple sources of micro-level gambling data demonstrate that lottery spending does not substitute for other forms of gambling. Household consumption data suggest that household lottery gambling crowds out approximately $43 per month, or two percent, of other household consumption, with larger proportional reductions among low-income households. Demand for lottery products responds positively to the expected value of the gamble, controlling for other moments of the gamble and product characteristics. This suggests that consumers of lottery products are not misinformed and are perhaps making fully-informed purchases. Chapter two investigates the nature of consumer choice under risk in the context of state lottery betting. Economists have traditionally modeled consumer preferences according to expected utility theory, but a recent body of literature challenges this model.