Measuring the Output and Prices of the Lottery Sector: An Application of Implicit Expected Utility Theory
Measuring the Output and Prices of the Lottery Sector: An Application of Implicit Expected Utility Theory
This chapter presents a novel approach to pricing gambling services, using data on the Canadian lottery system. The Bureau of Labor Statistics excludes gambling from the scope of the Consumer Price Index, partly because it is difficult to determine exactly the appropriate pricing concept and partly because the complexity of making adjustments for “quality” improvements seems to be incredibly complex. The author describes how the quality adjustment problem arises from the fact that, if a lottery increases the odds of winning the lottery, then it appears that a positive increase in “quality” has occurred. Although classical expected utility theory could be applied to provide answers to this quality adjustment problem, as the author notes, this theory does not work satisfactorily in the gambling context. The author tries to specify an appropriate concept, but its theoretical complexity and empirical volatility may prevent statistical agencies from adopting it.
Keywords: gambling, quality, expected utility theory, theoretical complexity, quality adjustment
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