ADMINISTRATIVE COSTS OF STATE LOTTERIES

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Abstract
A Cobb-Douglas cost function is estimated using pooled time-series cross-section data on state lottery sales and administrative costs. Strong evidence of economies of scale is found: administrative costs per lottery sales dollar decline as sales increase. Further tests reveal that economies of scale are not exhausted at the current sales level of any state. The results imply a low marginal cost of lottery production. At reasonable lottery demand elasticities, the monopoly pricing formula shows that lottery profits may be increased by reductions in take-out rates from current levels. In addition, the existence of economies of scale means that small states can reduce their administrative costs by combining their lottery operations.