Illegal Bookmakers

Abstract

This paper provides an economic analysis of illegal sports bookmaking using detailed records from six bookmakers who operated in the 1990s. These operations are structured like standard firms and utilize incentive contracts to induce appropriate employee behavior. The bookmakers offer prices which closely follow the geographically separated legal market, but larger operations price discriminate based on individual betting patterns. Despite the availability of inexpensive hedging instruments, all operations take on substantial financial risk. This implies the bookmakers cannot be risk-averse and must hold large cash reserves. The risk-adjusted profit rate is lower than in legal financial markets. These results and behaviors are consistent with standard models of economic self interest

1 Introduction

Gambling is ubiquitous in the United States. Due to the spread of state lotteries and casinos, legalized gambling is currently available in all but two states. In 1998 sixty-eight percent of Americans reported gambling at least once, and in total they lost over $50 billion to legal gambling operations