www.ccsenet.org/ijef International Journal of Economics and Finance Vol. 3, No. 4; September 2011 ISSN 1916-971X E-ISSN 1916-9728 54 Is the Lottery Product an Inferior Good in Higher Income Countries? Maria João Kaizeler (Corresponding Author) SOCIUS - Research Centre in Economic Sociology and the Sociology of Organizations, Lisbon, Portugal Rua Quinta do Paizinho, 22, Lisboa, Portugal Tel: 351-21-471-5224 E-mail: mkaizeler@gmail.com Horácio C. Faustino ISEG, Technical University of Lisbon and SOCIUS - Research Centre in Economic Sociology and the Sociology of Organizations, Lisbon, Portugal Rua Miguel Lúpi, 20, Lisboa, Portugal Tel: 351-21-392-5902 E-mail: faustino@iseg.utl.pt Received: August 5, 2010 Accepted: January 17, 2011 doi:10.5539/ijef.v3n4p54 Abstract Do the populations of low per-capita income countries participate with a stronger desire to win and spend relatively more money on lottery products? Is such a desire to buy lottery products constant, or does it decrease when the country reaches a higher per-capita income class? To answer these questions, this paper uses econometric models with significant explanatory variables. The results confirm the hypothesis that the lower income-class countries spend more than the higher income-class countries. However, the results do not confirm the hypothesis that lottery products may be considered an inferior good in countries belonging to the higher per-capita income class. The results also show that for all countries, there is an inverted U relationship between per-capita sales and per-capita GDP and up to a specific value, the per-capita lottery sales decrease as per-capita GDP increases, becoming an inferior good as a result. Keywords: Elasticity of demand, Income class, Gambling, Inferior good. 1. Introduction The Friedman-Savage (1948) utility function, elaborated upon expected utility theory, argues that utility in a specific segment of wealth is increasing. The dream of upward mobility into a higher socio-economic class is the explanation that the Friedman-Savage utility function puts forward to account for gambling and the purchase of lottery products. Wisman (2006) considers that the poor have limited options for recreation and the State, through the State lotteries, takes advantage of the poor. In this sense, revenues from lotteries would be a regressive tax. Gambling has become a popular, legal activity among poor and rich people throughout the world. People are found to play lottery games in more than half of the world’s countries. For example, in the United Kingdom, more than half of the adult population plays the lottery every week (see Sproston, 2002). Despite this, there have been few econometric cross-country or panel data studies on this phenomenon. Garrett pioneered the estimation of the income elasticity of demand for lottery products by income class, using a cross-country regression on the year 1997 and concluding that “the elasticity of demand for lottery ticket purchases is different both across continents and income classes.” (Garrett 2001, 224) The main purpose of the present paper is to deepen the study of Garrett and answer the question whether lottery products are an inferior good when we consider different income-class countries. Using regression analysis, this paper tests some theoretical hypotheses, namely, the hypothesis that per-capita lottery sales vary among income classes and the hypothesis that the income elasticity of demand for lottery products varies across income-class countries. The underlying theoretical explanation is that lottery products may be considered an inferior good in countries having the highest levels of per-capita GDP (an inferior good being defined as one for which purchases decrease as income increases). When income increases, the income elasticity of demand for this good becomes negative and lottery sales decrease. The paper also tests the hypothesis that lottery sales increase together with increases in per-capita GDP up to a point, and then decrease. In this case, when we consider the income as a continuous variable, there is an inverted U relationship between per-capita sales and per-capita GDP and up to a specific per capita income people will spend a declining percentage of their income on gambling as their income increase.