Spatial Competition and Cross-border Shopping: Evidence from State Lotteries

This paper investigates competition between jurisdictions in the context of cross-border shopping for state lottery tickets. We rst develop a simple theoretical model in which consumers choose between state lotteries and face a trade-o between travel costs and the price of a fair gamble, which is declining in the size of the jackpot and the odds of winning. Given this trade-o , the model predicts that per-resident sales should be more responsive to prices in small states with densely populated borders, relative to large states with sparsely populated borders. Our empirical analysis focuses on the multi-state games of Powerball and Mega Millions, and the identi cation strategy is based upon high-frequency variation in prices due to the rollover feature of lottery jackpots. The empirical results support the predictions of the model. The magnitude of these e ects is large but varies signi cantly across states. Finally, using these estimates of the degree of the mobility of the tax base, we show that competitive pressures from neighboring states lead to substantially lower optimal prices. Brian Knight Department of Economics Brown University Providence, RI 02912 Brian [email protected] Nathan Schi Sauder School of Business University of British Columbia Vancouver, BC V6T 1Z2 nathan.schi @sauder.ubc.ca We thank EeCheng Ong for careful research assistance and Bo Zhao, Jon Guryan, Melissa Kearney, and Tom Garrett for helpful comments on the paper. We acknowledge support from the New England Public Policy Center at the Federal Reserve Bank of Boston.