“Is Lottery Demand Driven by Effective Price or Rollover Money? Evidence from the China Lottery Industry” by Jia Yuan
University of Macau
Jason Z. Gao
There has been a long line of research on what factors explain lottery purchase decision under uncertainty. The traditional strand of research takes the expected loss of each ticket as the lottery effective price and uses it to understand lottery demand. Another possible explanation is that lottery demand depends more on the rollover money size (or the jackpot size) than the expected values. It is hard to separately evaluate these two different approaches as they share common factors which are hard to cleanly differentiate. In this paper, we examine these two approaches by exploiting a unique lottery game setup in China's lottery practice. This lottery game is similar to the lotteries in other countries except that there is a cap policy on the grand prize, which limits the reward of each jackpot winner. We show that this seemingly complex cap-policy actually causes the whole lottery price to be almost fixed all of the time although the rollover money from the last draw significantly varies. We show that in China's practice, the effective price approach cannot explain for the observed variation in lottery sales. Instead, we find that the size of the lottery rollover fits well the variation in lottery demand.