Selling state lotteries

The Illinois lottery may be up for sale. The current status is discussed in yesterday's NYT. The state hopes to get $10 billion. The lottery had $630 million in profits last year on sales of $2 billion. The buyer would get all profit for 75 bears.

Clever idea. Governor Rod Blagojevich gets the cash now and the political credit for spending it on schools, while his successors contend with the consequences. Yet more evidence that even a hedge fund is no match for a politician when it comes to short-term thinking. (I'm not even thinking about the problems of handing 10 billion to an Illinois politician. But then that's really too much to stuff in shoeboxes.)

How much is a lottery worth? That depends on whether the state can promise a monopoly. Can the state bind itself? Would we want the state to bind its future policymaking for present profit?

Even if the state can bind itself, can it prevent other states or the feds from offering lotteries that compete in Illinois? Note that corporations began as state controlled monopolies, but state competition led to general incorporation laws.

Should states sell their lotteries? States control gambling because they supposedly have reason to fear the excesses of private firms preying on people's weaknesses – e.g., advertising in adult book stores, or schools, or whatever. The state says no reason to fear that here because the lottery would still be regulated. But if regulation is enough, then why not allow competition? As it is, we're going to have one big rent-seeker lobbying for more freedom of action in Springfield.

The state says private ownership would be more efficient than government ownership. There's something to that. Although state governments can compensate for their lack of expertise by hiring private firms to manage the lotteries, the firm would still lack the incentives provided by a private firm's capital structure. A private firm needs owners, not voters.  Which is something to consider in connection with recent moves toward "shareholder democracy" in private corporations.

Finally, if lotteries, what else? Well, roads, jails, water treatment, other public facilities are already being sold or put under private management. Here the nature of the facility helps ensure some monopoly power. What about the state's licensing power? For example, should Illinois sell the power to license drivers. States own liquor stores – maybe they could sell those and prohibit others. What about the police?

States could get all kinds of one-time rents from their lawmaking power. They could use this money to finance their other activities.  But what other activities would be left? Maybe the only thing left of state (and federal?) government would be the preservation of the private monopolies they just sold.  But how do they do that if they've already sold off the police and court systems?

Update: As noted in a comment, I missed earlier posts on this (despite a modest research effort to find such posts) making some of the same points on the U of C blog by Saul Levmore and Randy Picker, here and here. 

Comments

[Randy Picker]

two posts on this on the chicago faculty blog if you are interested;

Levmore yesterday: http://uchicagolaw.typepad.com/faculty/2007/01/privatizing_the.html

Picker two days ago:
http://uchicagolaw.typepad.com/faculty/2007/01/selling_the_ill.html

[Robert Schwartz]

Isn't the first question: "Why is the State in the lottery business at all?"

If the answer is: "I don't know." They should sell. Any money received is capital and should be used for capital investment. But thatis another issue.