Why Prohibitions on Internet Gambling Won’t Work

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With the steady rise of commercial activity on the Internet, Washington has been steadily moving toward a formal prohibition of online gambling. Recently, a series of bills sponsored by Sen. Jon Kyl (R-AZ) and Rep. James Leach (R-IA) have sought to achieve this goal by restricting 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. Because Internet gaming operations are often located outside of the U.S., there is little Washington can do to restrict their actions.

Moreover, a prohibition policy has perverse effects and encourages the very behavior it seeks to curtail. This is illustrated by a close examination of one of the most popular forms of gambling; sports betting. There is a large demand for sports betting, and a large illegal sector has arisen to provide this activity despite a long‐​standing policy of prohibition. A similar ban on all Internet‐​based sports betting also is likely to fail. A legalized regime is a better way to mitigate the potential dangers of Internet betting. This argument is straightforward and it applies whether one regards gambling as a moral evil or a fundamental expression of individual freedom. 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.

To begin, let’s take a closer look at betting on major sports, which is currently illegal in all states besides Nevada regardless of whether it involves the Internet. 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 that individuals wager between $80 and $380 billion dollars with illegal bookmakers. This is nearly one hundred times the amount bet on professional sports with legal bookmakers in Nevada.

The sheer size of the illegal sports betting markets only tells part of the story. I recently completed an analysis of illegal bookmakers in New York city using actual records seized in series of arrests by the Kings County (Brooklyn) District Attorney office. I found that illegal bookmakers utilize policies which 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 hundreds of dollars at a time.

Second, illegal bookmakers take advantage of people’s mistakes. They know that 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 they are in Nevada sports books or with off‐​track horse betting parlors.

There is little evidence from the U.S. experience with sports betting to believe a prohibition policy limits the activity or prevents individual excesses. When an activity is widely demanded and socially accepted (at least in some circles), markets will find a way to deliver it whatever the legality. Our initial experiences with Internet gambling bear this out. Despite the current attempts at prohibition and even the arrest of one Internet bookmaker, the sector is proliferating. Internet operations catering to U.S. citizens operate from bases in countries as diverse as Antigua, Costa Rica and Australia. Given that such countries view Internet gaming as a legitimate activity, there is little possibility these companies will disappear anytime soon.

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. The on‐​street bookmakers have experience in providing and servicing financial credit, which would be difficult for the Internet books to provide given the difficulty of enforcing a debt contract from afar. 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. This possibility was an important rationale behind the recent move in the U.K. to encourage the repatriation of online betting operations. And finally a prohibition policy will fail in its most fundamental goal, limiting the availability of gambling to vulnerable populations. Internet bookmakers have little incentive to keep out underage or addicted gamblers.

A far more sensible policy would be to legalize Internet bookmakers. This would allow policies to be put in place which 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 which many feel passionately about. But the argument for legalization and regulation should have appeal for opponents and supporters of gambling alike.