Means Tested Public Assistance and the Demand for State Lottery Tickets

Empirical evidence suggests that the poor spend a larger fraction of their income on gambling than the well-to-do. This paper shows that "means tests" for public-assistance eligibility could supply part of the explanation. Income support programs can distort private budget sets, conceivably leading to risk-taking behavior on the part of rational agents with standard, concave utility functions. Latter sections of the paper employ a calibrated life-cycle saving model to study resulting demands for actuarially fair lotteries numerically. The analysis demonstrates that allowing lotteries can simplify model-related computations a great deal. (Copyright: Elsevier)