(DP 2011-03) The Demand for Unfair Gambles: Why Illegal Lotteries Persist

Abstract

We show how cheating in illegal gambling can be sustained in equilibrium, even when gamblers are aware of it. Not only is cheating profit-maximizing for operators, but it can also be utility-maximizing if it provides gamblers the opportunity to engage in other related activities that generate non-monetary rewards, such as practicing superstitions. This, in turn, suggests why legalizing gambling might not fully capture the gains from the illegal market - operators and gamblers both prefer cheating, but this would be harder to hide in a legalized environment. We illustrate the model, generate results, and verify them empirically, using the example of jueteng, an illegal numbers game in the Philippines.