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How (not) to regulate gambling

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In many countries, there is a demand for regulation of gambling, as gambling is considered a vice with potentially harmful consequences. However, regulating gambling and similar goods is somewhat problematic. Even benevolent regulators may fail to think through all the unforeseen consequences of adopted measures. Furthermore, it often does not occur to the regulator that the mere risk of addiction (which gambling poses) does not automatically necessitate regulation. This article highlights some specific experiences that the Czech Republic has gained in this respect in recent years and how other countries can learn from them.

Prohibition is not the solution

In the Czech Republic, the rules for regulating gambling at the local government level provide mixed incentives for the regulators. 65% of the total tax revenue from technical games (slot machines) and 30% of the tax revenue from other land-based gambling goes to municipal budgets. Local governments are thus motivated to encourage technical games, which are considered most harmful to gamblers.

If mayors decide to ban entirely land-based gambling in their territory, they will forgo this tax revenue. However, their voters often demand the ban of gambling, as gambling is associated with addiction, crime, the decline of families into poverty, the economic decline of the entire region, unemployment, etc. Municipalities often succumb to the pressure from their constituents and ban gambling. This graph shows the number of municipalities with a ban on technical games, but not on other types of gambling (green columns) and with a ban on all types of gambling (grey columns).

However, proving causality between such widespread activity as gambling and, for example, crime is complicated. In a forthcoming study, one of us compared crime in municipalities with a gambling ban and in municipalities without a ban before and after the ban itself. He concluded that the ban itself had no effect on crime in the municipalities: where crime rose before the ban, it rose after the ban, and conversely, where crime declined in the long term, it declined after the ban on gambling in the municipality. The problem is the identification of so-called comorbidities, i.e., the presence of two or more conditions at the same time. For example, it is quite common for an individual to suffer from depression or alcoholism along with gambling addiction, but distinguishing cause and effect is very difficult in practice.

While the benefits of gambling bans may be overestimated, the costs of these bans may be underestimated. The total cost of the ban is the loss of surplus that could have been generated by the gambling market and shared among consumers, firms, and municipalities. From the perspective of the municipalities, the cost of the ban lies in the lost revenue to the municipal coffers. When the capital city of Prague banned virtually all land-based gambling on its territory from 1 January 2021, it gave up nearly two billion CZK (more than 80 million EUR) in tax revenue by the end of 2025. To the proponents of this decision, this amount may seem acceptable – even if the likelihood of improving the situation is relatively small.

Yet, it is not so simple. First, the two billion does not take into account, for example, the decline in tourism (e.g., in popular casinos in the center of Prague) and, in particular, the fact that the gambling ban will not make gambling disappear. Banned gambling in gambling halls or casinos can easily be substituted by many other activities – gambling outside the municipality (casinos in the border areas even offer free transport to and from Prague), gambling on the black market, and especially gambling on the internet, not to mention innovations such as loot boxes in computer games. Although the state has taken many measures regarding safe online gambling, the fact remains that, as far as pathological gambling is concerned, “supervised” land-based gambling is the safer option. The gambler is “supervised,” may not be offered alcohol to play with, can more easily bypass the log-in system, etc.

A municipality that bans gambling on its territory is thus placed in a very paradoxical situation. It has driven gamblers out of the safe, monitored environment of the gambling hall or casino into the wild online environment where they feed their addiction and generate the same social costs (unemployment, vandalism, domestic violence) as before. If a gambler chooses a gambling hall or casino outside the city limits, he contributes to the municipal coffers elsewhere, but he incurs the costs at home, i.e., in the municipality that has banned gambling. And if he indulges his passion on the black market, the situation is even worse since it is here that the costs are the highest.

An additional argument against the gambling ban was provided by a natural experiment during the Covid-19 pandemic, during which all land-based gambling halls and casinos were completely closed for quarantine reasons for a total of 138 days in 2020 and 150 days in 2021. Although this is a crude “before-after comparison,” and the case would merit more robust statistical research, the results show that the general prevalence of gambling has slightly decreased, and the prevalence of risky gambling has slightly increased. Thus, the nationwide elimination of land-based gambling resulted in less “normal” gambling and more “harmful” gambling.

Let’s Base Decisions on Facts, Not Emotions

The misperception of the cost and benefits of the gambling bans illustrate a more general problem, namely, the general reluctance, unwillingness, or inability to perform regulatory impact assessments (RIAs). This problem prevails at both the central and municipal levels. Not only do municipalities almost never analyze the impact of, for example, the aforementioned ban on gambling in their territory, but the government does not analyze the impact of its measures, such as the gambling tax reform it introduced in the middle of this year.

The government estimated the impact of this tax reform in terms of higher tax receipts by CZK 4.2 billion, an amount that is suspiciously close to the calculation when the last known figures are simply multiplied by the higher tax rate. However, such an estimate is extremely inaccurate, as it ignores a change in the tax base as the whole sector grows. We have estimated the impact on the tax receipts, taking into account the growth of the gambling sector as well as its response to a higher tax, and our estimated tax revenue comes out four times higher.

The problem is not so much the data. Addictionologists produce robust and long-term data on many aspects of gambling – prevalence, gambling behavior, popularity of each type of game, online gambling, money wagered and paid out, etc. The problem is rather the fragmentation of such research, where the studies produced tend to be commissioned by a particular organization (often with some agenda), and above all, the low standards of methodology, where even very rudimentary analyses using basic tools with zero predictive power are pervasive.

Economic research on gambling, like economic research on e.g., drug addiction, tobacco, etc., suffers from many interrelated ills. The biases of some researchers are reflected in their unwillingness (or inability) to analyze the situation robustly and to interpret the results objectively. In such an environment, it is then easy to accuse the other side of bias, whether due to the influence of the gambling lobby or, conversely, a paternalistic desire to ban anything harmful. It is precisely in such cases where robust empirical analyses are indispensable and may lead to better decisions on how to (de)-regulate the gambling market.

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