Modelling demand for lotto using a novel method of correcting for endogeneity

Baker, RD; Forrest, D; Perez, L

Abstract

Modelling lottery sales as a function of the mean, standard deviation and
skewness of the probability distribution of returns potentially gives insights into how the
design of a game could be modified to maximise net revenue. But use of OLS is
problematic because the level of sales itself affects values of the moments (and
insufficient instruments are available for IV regression). We draw on the concept of a
rational expectations equilibrium, developing a new regression model which corrects for
endogeneity where the causal impact of the dependent variable on the right-hand side
variables is deterministic. Results provide more reliable guidance to lottery agencies
because accounting for endogeneity leads to significantly different results from OLS and
these results have superior performance in out-of-sample forecasting of sales. More
generally, results prove consistent with the Friedman-Savage explanation of why people
buy lottery tickets and with evidence from racetrack data that ‘bettors love skewness’.

Citation

Baker, R., Forrest, D., & Perez, L. (2020). Modelling demand for lotto using a novel method of correcting for endogeneity. Economic Modelling, 84, 302-308. https://doi.org/10.1016/j.econmod.2019.04.021

• Journal Article Type: Article
• Acceptance Date: Apr 25, 2019
• Online Publication Date: May 5, 2019
• Publication Date: Jan 1, 2020
• Deposit Date: May 20, 2019
• Publicly Available Date: May 5, 2020
• Journal: Economic Modelling
• Print ISSN: 0264-9993
• Publisher: Elsevier
• Volume: 84
• Pages: 302-308
• DOI: https://doi.org/10.1016/j.econmod.2019.04.021
• Publisher URL: https://doi.org/10.1016/j.econmod.2019.04.021
• Related Public URLs: https://www.sciencedirect.com/journal/economic-modelling
• Additional Information: Additional Information : Originally titled "Modelling demand for lotto using a new way to correct for endogeneity"