Lottery Breakage

We recently wrote about how some $8 billion in gift card value goes unredeemed in a given year, representing 10% of all gift card purchases. In the retail industry, this $8 billion gift is called “breakage.”

State lotteries, it turns out, also rake in a bit of breakage. Here’s a N.Y. Times article about winning lottery tickets that go unclaimed, citing examples of a $14 million prize in Illinois in 2005 and a $51.7 million prize in Indiana in 2002. I am guessing that the states claim far less breakage than the retail industry’s 10%, but this is still serious money — especially when you are already paying yourself a very, very healthy vigorish.

I cannot find any authoritative catalog of what percent of the pot each state keeps for itself from its lotteries, but over the years I’ve seen figures cited from 30% to 70%. Even at the low end, this would mean that our state governments rake a bigger vig than any horse track, casino, or bookie on earth.

Are people who play the lottery aware that perhaps 30% of their bet goes straight into the bookie’s pocket? I doubt it. It would be very interesting to post the vig of each state’s lottery on a web site where all players could check it out. (Does anyone know if such a site already exists? Here’s a site with links to every state lottery, but on the couple of state sites that I checked out, the vig wasn’t readily visible.) I wonder how fast the players would respond to the different rates — if neighboring states, e.g., kept 30% and 45% of the pot, respectively, would lottery players from the 45% state start flooding the 30% state until their own state lowered its vig?

Now that some state lotteries may soon be privatized, it will be interesting to see how the private firms set the vig. Will they keep it high, or even raise it, knowing that few people who play the lottery know or care? Will they make it lower in order to attract players from other states?

All lottery comments welcome.