Economic Naturalist

Why do provinces with lotteries generally prefer large prizes?

The draw of economic rent is strong. Buying a lottery ticket is an example of an attempt to gain a great return for a relatively small expenditure. From the viewpoint of the province it seems that it should not matter whether the prizes are handed out in "small" (under $1 million) prizes or in large prizes. As it turns out, however, provinces bring in greater revenue when they can generate greater interest in their lottery.

In general, provinces use roughly half the money collected from lottery ticket sales to fund the prizes. The Western Canadian Lottery Corporation, for example, divides its revenues as shown:

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This is typical of most Canadian lotteries. Why might provinces hope for a long period with no winners, resulting in truly huge jackpots? Lottery commissions are well aware of the rent-seeking behaviour discussed in your text in Chapter 8. They are also well aware that as the potential marginal benefit of buying a lottery ticket rises, with a fixed price, the number of tickets sold will increase. The result is that as the size of the prize increases, the number of tickets sold per week increases as well and, in the case of the Western Provinces, 49.9% of the collected monies go directly into provincial coffers. Bigger prizes translate into more sales and more revenue for the worthy projects lotteries are in place to support.