Willingness to pay and the demand for lotto

Jen-Hung Wang, Larry Tzeng and Junji Tien

Applied Economics, 2006, vol. 38, issue 10, 1207-1216

Abstract: Why do many bettors participate in an unfair gamble, in particular a lotto game, while at the same time purchase insurance? The willingness-to-pay for lotto is analysed to find a 'rational' explanation for a (local) risk-averter's participation in an unfair bet. A reasonable case is found where bettors' preference can be approximately characterized as a locally risk-averse and sufficiently prudent cubic function. Such bettors dislike risk but prefer standard third moment of the payoff. The result suggests that the traditional effective price for lotto demand may omit important explanatory variables. We thus propose an alternative method to examine the demand for lotto by incorporating the second and the third moments of lotto's payoff. Evidence from Taiwan Lotto data supports that lotto bettors could be both (locally) risk-averse and rational.

Date: 2006
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DOI: 10.1080/00036840500405938

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