Economic Impacts of Native American Casino Gambling Laura Swanbeck May 4, 2004 Econ. 300

Background Casino gambling has grown dramatically in the U.S. over past 30 years Destination resorts, former mining towns, riverboats, urban/suburban settings, Indian reservations Industry characterized by high profits and economies of scale, but lacked access to mainstream sources of financial capital 1996-Congress mandated National Gambling Impact Study Commission to investigate social and economic implications of gambling on society

Indian Reservation Casinos First one was Mashantucket Pequot tribe’s Foxwoods casino in Connecticut, built in presently largest in the world Under Indian Gaming Regulatory Act, 14 tribes in NM authorized to operate gaming activities; only 11 currently do 1995-New Mexico Indian Gaming Association starts promoting jointly-developed, state-wide economic model of impacts of Indian gaming

Economic Concepts Consumer utility and choice Cost-benefit analysis through external social costs and benefits

Consumer Utility Model Tries to explain what motivates consumers to gamble- something beyond expected monetary gain Traditional theory says expected value of a game motivates gambling. Expected value is given by sum of outcomes multiplied by their probabilities. However, since what the player loses equals what the house wins, the games would be “fair” and casino would earn zero revenue. Utility theory introduced by famous mathematicians of the 18 th century-expected utility motivates gambling

Bernoulli’s Utility Function Utility of a game is a function of the monetary gain or loss (w) from it. U(w) = a log(w/b) This function says utility from additional money decreases as a player’s wealth increases-Diminishing Marginal Utility Expected utility is sum of utility of each outcome multiplied by its probability

Cramer’s Utility Function Utility is square root of monetary value: U(w) = w 1/2 This function also shows that incremental wealth brings diminishing marginal utility WTP is amount that will generate utility equal to game’s expected utility, still given by sum of utility of each outcome multiplied by its probability

Example of Cramer’s Function U(w) = w 1/2 Monetary gain (w)Utility $11.00 $52.24 $ $ $

Utility and Gambling Choice An individual with either Bernoulli’s or Cramer’s utility function is typically a risk-averter Graphically, function is concave with positive 1 st derivative and negative 2 nd derivative, as shown below: U(w) U=w 1/2 W

Utility and Gambling Choice cont. Based upon expected utility theory, if expected utility is greater than expected loss on amount paid, consumers will play. If expected loss is greater than expected utility, they will not play. The question is whether a risk-averter will gamble, given diminishing marginal utility. Even though gambling is a risk-taking behavior, in reality, most gamblers are rational risk averters-the presumption that all gamblers are risk takers is therefore implausible Utility function does not explain why risk averters will gamble; explained by subjective utility hypothesis, gaming amenities, and the pleasure-of-gambling hypothesis If not controlled, the utility gained from choosing to gamble can lead to problem gambling, which has negative impacts on the individual, the family, the workplace, financial health, and criminal record

Cost-Benefit Analysis A cost-benefit analysis of Indian casino gambling in NM can be done by analyzing the external social costs and benefits on tribal development Simulation modeling using input-output modeling such as IMPLAN model helps to understand gaming impacts in the economy –Based on this model, the resident and tourist spending on Indian gaming accounted for a loss of 1,480 jobs and $15.8 million in income in other sectors of NM economy in –However, an offsetting net gain of 11,360 jobs and $216 million in income in other sectors also occurred-giving Indian gaming a net positive economic effect

External Social Costs Pathological gambling and associated social costs could become pervasive in NM-leads to negative fiscal impacts such as more public assistance and publicly funded social or health care services –39% of all New Mexicans gamble at casinos or other facilities, 24.9% at Indian gaming facilities in NM Concern that it promotes a higher incidence of crime- contradicted by statistics on crime and other facts and circumstances surrounding gaming in U.S. –Highly regulated and carefully managed by the tribes in NM –Significant legislative and regulatory oversight of gambling makes industry unattractive for organized crime

External Social Costs cont. 3 layers of regulation in NM: –Indian Gaming Regulatory Act (IGRA) provides regulation by individual tribes and federal government –Gaming compacts allow the tribes and the State to regulate gaming –Tribal law enforcement agencies work with local, state, and federal agencies to prevent criminal activity

External Social Benefits NM Indian tribes are confronted by high poverty and unemployment rates, poor living conditions and low levels of education-leads them to promote tribal economic development Some tribes use Indian gaming as a way to promote economic opportunity and enhance quality of life among reservation residents –Employment opportunities for tribal members, increased income and alleviation of poverty-renewed sense of opportunity and self reliance –Renewed sense of prosperity and hope among members who have benefited from new infrastructure projects, scholarships, indirect employment opportunities

External Social Benefits cont. IGRA stipulates net revenues from tribal gaming can be used only for: –Tribal government operations or programs –General welfare of the tribe and its members –Tribal economic development –Donations to charitable organizations –Operations of local government agencies In NM, tribes are spending net revenues on: –Senior citizen centers –Day care centers –Cultural preservation –Scholarships –Educational programs –Many other beneficial social activities

Conclusion