The new institutional economics of casino gambling

This thesis develops a new microeconomics of casino gambling based upon the New Institutional Economics tradition, through recognizing that the play of table games is a series of financial contracts with a specific pattern of transaction costs that necessitate particular governance structures for their efficient execution. This thesis then applies this new microeconomic theory to the issues of casino gambling regulation and online casinos. In doing so, this thesis arrives at new policy implications for efficient regulation of both physical and online casinos, and replaces the Pigouvian/market-failure oriented perspective (which casts casinos as inherently inefficient) with the notion that casinos are fundamentally an efficient governance structure for the activity of playing table games.<br><br> The thesis begins by noting five characteristics of casinos that are irreconcilable with standard theories of the economic function that the casino serves. In order to remedy this deficiency, this thesis proposes a new model of the casino as an economic institution that economizes on the transaction costs inherent in playing table games. The casino exists to make it possible for people to gamble with complete strangers without having to fear being cheated or deceived by them, and thus increases viable transacting opportunities. This model explains the five noted characteristics and, therefore, alongside the model's foundational insights, represents the primary contribution of this thesis.<br><br> The casino is a classic vertically-integrated firm, albeit one with platform characteristics (in particular with respect to poker). The casino internally organizes security. The casino operates within a contained space that has borders with controlled entry and exit points. The casino mandates that transactions are made in a particular medium - chips - that constitutes a relationship-specific financial asset. The casino can be understood as a microcosm of the State - as an entity which comes into existence to control disorder within a specific geographical region, yet necessarily possesses powers that can be abused. To the extent that this analogy is valid, concepts from comparative institutional analysis can be used to illustrate the costs that casinos themselves impose. <br><br> That casinos mandate transactions be made in casino-specific chips is the fact which grants casinos the ability to abuse their power and impose substantial costs in the form of bankroll expropriation. <br><br> The second contribution this thesis makes is to propose an integrated theory explaining both the mandatory use of casino chips and the phenomenon of spectacular casino interiors and exteriors, where the former is a necessary component of governing the transactions of table games, but because it creates the risk of bankroll expropriation casinos engage in the latter as a way to credibly demonstrate the unlikelihood of such expropriations occurring. A costly signalling model is developed, and the model suggests that except perhaps in exceptionally unusual (or unrealistic) situations signalling is sufficient to remedy asymmetric information. <br><br> In light of this theoretical exposition, this thesis portrays the casino as a fundamentally efficient governance structure capable of self-regulation. This unavoidably conflicts with the conventional perception of casinos as defined primarily by the creation of a negative externality (in the form of problem gambling), and the resultant Pigouvian orientation toward casino regulatory policy. Additionally, the literature on casino regulatory policy consistently endorses a Public Choice explanation for real-world policy. The third contribution this thesis makes is to use a modified Subjective Institutional Possibility Frontier model to depict self-interested politicians operating within cultural, political and epistemic constraints to craft regulation which serves governmental interests yet is publicly justified as, and often popularly perceived as, serving the public interest. Widespread, entrenched, yet ultimately uninformed assessments of the potential costs of casino gambling skew the set of politically-feasible policy alternatives towards inefficiently prohibitionist options. <br><br> This thesis then looks at the subject of online casinos through a New Institutional Economics lens. A critical aspect of the proliferation of online casinos is that government prohibition is generally ineffective, and the accessibility of such gambling is exceptionally widespread, and this raises novel policy challenges for regulators. It is, however, likely that online casinos are not a close substite for physical table games (including those played in casinos) in the first place. The signalling model developed for physical casinos, and the model of political change developed to address casino gambling regulatory policy, are both found to be applicable to online casinos, and a set of policy implications are outlined. <br><br> This thesis represents the first contribution to the economics of casino gambling from the New Institutional Economics perspective. It also draws upon signalling theory, comparative institutional analysis and the economics of platforms in order to develop deeper understanding of the industrial organization of the casino as well as the political economy of casino gambling regulation.