Why Prohibitions on Internet Gambling Won’t Work

Published June 1, 2004

Recently, bills sponsored by Sen. Jon Kyl (R-Arizona) and Rep. James Leach (R-Iowa) have sought to restrict the flow of funds into Internet gambling operations. While such policies might spring from a certain moral viewpoint, they are unlikely to succeed in limiting online betting. Moreover, a prohibition policy has perverse effects and encourages the very behavior it seeks to curtail.

Bans Haven’t Worked

Betting on major sports, regardless of whether it involves the Internet, is currently illegal in all states except Nevada. While these bans are primarily enforced by states, the federal government does get involved if wagers cross state lines or there is an alleged involvement of organized crime. So how successful has this regime of prohibition been at eliminating sports betting?

By almost any measure it is a failure. A recently completed report from the National Gambling Impact Study Commission estimates individuals wager between $80 billion and $380 billion with illegal bookmakers. This is nearly one hundred times the amount bet on professional sports with legal bookmakers in Nevada.

I recently completed an analysis of illegal bookmakers in New York City using records seized in a series of arrests by the Kings County (Brooklyn) District Attorney’s office. I found that illegal bookmakers utilize practices that exacerbate the potential harm of gambling.

First, they offer short-term credit and allow bettors to wager for a week or longer without fronting any money. Credit might allow individuals to gamble beyond their financial means and leads some bettors to wager intensively in an attempt to “catch up” before their debt is due. In fact, most of the bettors in my records would be considered compulsive gamblers, wagering almost every day and laying out hundreds of dollars at a time.

Second, illegal bookmakers take advantage of people’s mistakes. They know many bettors are fans of certain teams. In the case of the bookmakers I have records for, about a quarter of the bettors appear to be New York Yankees fans who wager consistently on their team. The bookmakers understand this tendency and “price discriminate” against such bettors: They charge them a significantly higher price for their Yankees bets. While price discrimination does have an important role to play in free markets, it is likely that consistent use of it would be precluded if sports betting was legalized and above-board, much as it is in Nevada sports books or with off-track horse betting parlors.

Unintended Consequences

Presuming the current attempts at prohibiting Internet sports betting persist, what might we expect to see? First, there will be a growing alliance between Internet bookmakers and the more traditional illegal bookmaker. There is already evidence that Internet operations have started to pay their illegal on-shore cousins to run their credit business. Such interaction will help reinforce the influence of the illegal sector and will exacerbate the perceived problems of sports betting, such as facilitating money laundering.

Second, prohibition will drive the Internet operators further from the U.S. An important feature of the Internet is that it makes physical distance largely irrelevant, and from a bettor’s perspective it is just as convenient to wager on-line with an Antigua bookmaker as with one down the street.

As bookmakers move further from U.S. soil to escape its influence, it will become harder and harder to legalize Internet gaming in the future as the bookmakers get ensconced in their offshore locations.

A legalized regime is a better way to mitigate the potential dangers of Internet betting. This would allow policies to be put in place that could limit the potential excesses of gambling and minimize the role of the criminal element. As side benefits, a legalized regime would likely displace the widespread illegal operations.

It is perhaps understandable that such an option is rarely considered. Gambling is a subject about which many feel passionately.

But the argument for legalization and regulation should have appeal for opponents and supporters of gambling alike. Even if one takes the principled stand that gambling is fundamentally wrong, a policy of prohibition is unlikely to advance the goal of eliminating gambling altogether.

Koleman Strumpf ([email protected]) is an associate professor of economics at University of North Carolina at Chapel Hill and a visiting fellow at the Cato Institute in Washington, DC.