• EconAfterHours


Updated: Mar 11, 2020

By Aditi Acharya

Imagine, a few years from now, you’re strolling along a shopping arcade. On your way back to the car – yes, it might be driving itself to pick you up – you’re distracted by a sign advertising the weekend’s NBA, NFL or Premier League games, and how you can profit from them. It is a gambling or betting office, where you wager on the outcome of these games just as easily as plucking groceries off a shelf.

The Supreme Court of the United States recently struck down a federal law that bars gambling in sports, giving states the go-ahead to legalize the same. This was a much anticipated move which presents entrepreneurs with an opportunity to make inroads into this new sporting arena and makes the above described scenario a reality in the imminent future.In India, discussions about legalising sports gambling gained momentum post the Indian Premier League spot-fixing scandal in 2013, however, it remains heavily restricted except for selective categories including lotteries and horse racing.The principal reasoning behind legalising wagers on horse racing contests is that betting on horse racing is a matter of skill. A recent judgement of the Punjab and Haryana High Court added further weight to this argument as it explained how fantasy games cannot be subsumed within the ambit of gambling because it involves considerable skill and judgement.

One line of thought which explains the intent behind prohibiting it is the will to discourage any activity which causes harm to the public and consequently leads to loss of the common man’s hard-earned (or maybe not so hard-earned) money. It is also generally believed that legalising sports betting will lead to much more match fixing and corruption in sports and hence an increase in the integrity monitoring costs incurred by the pro-sports leagues. The argument validating the same is that legalized betting will significantly increase the opportunities available for the public to bet on games, thereby increasing the risk of match-fixing. What might be the flaw in this logic? The answer is: People already have access to illegal bookmakers. Bets placed in the black market, by definition, neither enter the regulation net nor do bettors have any incentive to report suspected match-fixing as it would inevitably lead to more scrutiny of their illegal activities. Legalization will, in fact, shift a portion of these bets from the black market to the regulated one. This should actually reduce the monitoring outflow from the leagues because the burden of upholding the spirit of the game will now also be shared with regulated sportsbooks and consumer protection agents. Since ethical companies will now have greater incentive to report malicious behaviour, it will therefore be easier for regulators to identify and nab match-fixers.

While it might be a reasonable bet to think of legalized sports betting as a substitute for other forms of betting, in say, casinos or lotteries (already legal in certain states in the US), the odds are higher in favour of thinking of it as a substitute for sports betting in the parallel economy. Even if a small portion of gambling transactions makes a transition into the legal markets, it would generate more output, jobs, income and taxes that would represent a net gain to economic activity that is legal, reported and quantified as part of the national accounts. The economic gains will take the form of capital investments in legal betting offices, purchase of various goods and services like sports and media content, legal and financial services and higher employment for operators, technicians and regulators. This will also give fiscal collections a boost as income tax collections from sports betting employees and the reported net winnings of bettors, corporate income tax, property tax, and other business taxes supported by sports betting operations will add to the exchequer.

Does this mean the US should legalise gambling and turn it into an unregulated free market? Perhaps one of the most widely admired of all the economic theories taught to students is the notion that an unregulated competitive economy is optimal for everyone. George Akerlof and Robert Shiller, in their book, “Phishing for Phools: The Economics of Manipulation and Deception” talk about how standard economic theory is typically over enthusiastic about unregulated free markets. It usually ignores the fact that, given normal human weaknesses, an unregulated competitive economy will inevitably spawn an immense amount of manipulation and deception. Economic theory explains with a few caveats that a competitive free-market economy will be “Pareto-optimal”. A Pareto-optimal economy is achieved when it is impossible to make any one person better off without making at least someone worse off. In economic jargon, each person individually maximizes a “utility function” that represents his or her own welfare. This theory is often referred to as the “first fundamental theorem of welfare economics,” substantiated with mathematical elegance. A lot of questions have been raised against this theory and surprisingly enough, the first protest came from Pareto himself. He did not intend his insights to be employed in the manner in which they are today. Pareto recognised that his concept of optimality oversaw some important moral dimensions: People in free markets do not really maximize what the philosopher Jeremy Bentham called their ‘utility’, but something else, something much more limited. In 1918, Irving Fisher, the Yale economist, argued that what people maximize with their actions is something that could better be described as “wantability” rather than utility, for they are subject to temptation and mistakes in the vast array of purchases they make, leading profit-maximizing marketers to take advantage of them on a systematic basis. In the market for gambling too, the bettors are not free from temptations offered to them by exploitative bookies and hence end up optimising their ‘wantability’, keeping moral dimensions of the sport in oblivion. The existence of these manipulative and deceptive actions of the market players call for the involvement of referees (regulation).  

Indian law classifies games into two broad categories : Game of skill and game of chance. Betting in horse racing has been categorised as a game of skill as the bettor has to gauge the physicality of the horse, deftness of the jockey, conditions of the turf and other factors with his acuity before placing a bet. Drawing an analogy from this, isn’t placing a bet in a regulated gambling market for any other sport involve skill and judgement regarding the players,conditions etc? Hence, shouldn’t it be categorised as a game of skill too?

Finally, the Indian economy would surely benefit if we can abandon this subjectivity around the notion of betting being a game of skill or not. Instead, we should look at this issue through a fresh economic perspective. Taking a firm stand on this issue of legalising and regulating gambling is also a game of skills and decisiveness and I bet you and our nation stand to win!

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