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 ofonline gambling. Recently, a series of bills sponsored by Sen. JonKyl (R-AZ) and Rep. James Leach (R-IA) have sought to achieve thisgoal by restricting the flow of funds into Internet gamblingoperations. While such policies might spring from a certain moralviewpoint, they are unlikely to succeed in limiting online betting.Because Internet gaming operations are often located outside of theU.S., there is little Washington can do to restrict theiractions.

Moreover, a prohibition policy has perverse effects andencourages the very behavior it seeks to curtail. This isillustrated by a close examination of one of the most popular formsof gambling; sports betting. There is a large demand for sportsbetting, and a large illegal sector has arisen to provide thisactivity despite a long-standing policy of prohibition. A similarban on all Internet-based sports betting also is likely to fail. Alegalized regime is a better way to mitigate the potential dangersof Internet betting. This argument is straightforward and itapplies whether one regards gambling as a moral evil or afundamental expression of individual freedom. Even if one takes theprincipled stand that gambling is fundamentally wrong, a policy ofprohibition is unlikely to advance the goal of eliminating gamblingaltogether.

To begin, let's take a closer look at betting on major sports,which is currently illegal in all states besides Nevada regardlessof whether it involves the Internet. While these bans are primarilyenforced by states, the federal government does get involved ifwagers cross state lines or there is an alleged involvement oforganized crime. So how successful has this regime of prohibitionbeen at eliminating sports betting? By almost any measure it is afailure. A recently completed report from the National Gambling Impact Study Commission estimatesthat individuals wager between $80 and $380 billion dollars withillegal bookmakers. This is nearly one hundred times the amount beton professional sports with legal bookmakers in Nevada.

The sheer size of the illegal sports betting markets only tellspart of the story. Irecently completed an analysis of illegal bookmakers in New Yorkcity using actual records seized in series of arrests by theKings County (Brooklyn) District Attorney office. I found thatillegal bookmakers utilize policies which exacerbate the potentialharm of gambling. First, they offer short-term credit, and allowbettors to wager for a week or longer without fronting any money.Credit might allow individuals to gamble beyond their financialmeans and leads some bettors to wager intensively in an attempt to"catch-up" before their debt is due. In fact most of the bettors inmy records would be considered compulsive gamblers, wagering almostevery 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 caseof the bookmakers I have records for, about a quarter of thebettors appear to be New York Yankees fans who wager consistentlyon their team. The bookmakers understand this tendency and "pricediscriminate" against such bettors: they charge them asignificantly higher price for their Yankees bets. While pricediscrimination does have an important role to play in free markets,it is likely that consistent use of it would be precluded if sportsbetting was legalized and above-board, much as they are in Nevadasports books or with off-track horse betting parlors.

There is little evidence from the U.S. experience with sportsbetting to believe a prohibition policy limits the activity orprevents individual excesses. When an activity is widely demandedand socially accepted (at least in some circles), markets will finda way to deliver it whatever the legality. Our initial experienceswith Internet gambling bear this out. Despite the current attemptsat prohibition and even the arrest of one Internet bookmaker, thesector 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 Internetgaming as a legitimate activity, there is little possibility thesecompanies will disappear anytime soon.

Presuming the current attempts at prohibiting Internet sportsbetting persist, what might we expect to see? First, there will bea growing alliance between Internet bookmakers and the moretraditional illegal bookmaker. The on-street bookmakers haveexperience in providing and servicing financial credit, which wouldbe difficult for the Internet books to provide given the difficultyof enforcing a debt contract from afar. There is already evidencethat Internet operations have started to pay their illegal on-shorecousins to run their credit business. Such interaction will helpreinforce the influence of the illegal sector and will exacerbatethe perceived problems of sports betting, such as facilitatingmoney laundering.

Second, prohibition will drive the Internet operators furtherfrom the U.S. An important feature of the Internet is that it makesphysical distance largely irrelevant, and from a bettor'sperspective it is just as convenient to wager on-line with anAntigua bookmaker as with one down the street. As bookmakers movefurther from U.S. soil to escape its influence, it will becomeharder and harder to legalize Internet gaming in the future as thebookmakers get ensconced in their offshore locations. Thispossibility was an important rationale behind the recent move inthe U.K. to encourage the repatriation of online bettingoperations. And finally a prohibition policy will fail in its mostfundamental goal, limiting the availability of gambling tovulnerable populations. Internet bookmakers have little incentiveto keep out underage or addicted gamblers.

A far more sensible policy would be to legalize Internetbookmakers. This would allow policies to be put in place whichcould limit the potential excesses of gambling and minimize therole of the criminal element. As side benefits, a legalized regimewould likely displace the widespread illegal operations. It isperhaps understandable that such an option is rarely considered.Gambling is a subject which many feel passionately about. But theargument for legalization and regulation should have appeal foropponents and supporters of gambling alike.

Koleman Strumpf

Koleman Strumpf is an associate professor of economics at University of North Carolina at Chapel Hill and is currently a visiting fellow at the Cato Institute. His research on gambling and other topics is available at his web site, http://www.unc.edu/~cigar. To subscribe, or see a list of all previous TechKnowledge articles, visit www.cato.org/tech/tk-index.html.