The Sports Gambling Disaster

If you’ve watched almost any major sporting event in the past five years, you may have noticed the inescapability of sports betting. Ads for sportsbooks like FanDuel or DraftKings are everywhere: on the sidelines, at half-time, and even in the talking-head commentary on ESPN. Roughly 4 in 10 Americans now bet on sports, and the industry is pulling in over $10 billion per year, with room still to grow.

This is all a remarkable sea change from 2018, when the Supreme Court struck down a 1992 federal ban on sports gambling in all but a few states. Today, 38 states and the District of Columbia have created sports gambling markets, with most other states looking to follow suit.

Very little is known about the social impact of this rapidly growing industry. But two recent working papers shed new light on what the spread of sports gambling has done to American households. The picture is not pretty: the rise of a new, highly addictive, straight-to-your-smartphone commodity has caused a surge in bankruptcies, bank overdrafts, and debt collections, concentrated among those households least able to afford them.

To reach their conclusions, both papers use the same empirical strategy, exploiting the staggered roll-out of state-level sports gambling. In effect, residents of states where sports gambling has been legalized are, in each observed quarter, compared to residents of states where it has not yet been legalized—or is never legalized. Because residents are observed before and after legalization across many states, one can statistically control for unobserved characteristics at the household and quarter level, allowing plausible identification of the causal effect of legalization on financial outcomes.

Northwestern’s Scott Baker and colleagues, in their working paper, apply this approach and find—unsurprisingly—that legalized sports gambling causes some people to start gambling. They estimate that about 14% of residents become bettors following legalization, with average expenditures of about $700 per year.¹ Expenditures grow over time, from less than $5 per quarter just after legalization to roughly $70 per quarter four years on—suggesting that people’s habits tend to grow with the industry. 

Sports betting legalization affects household finances in other ways. It increases credit card debt for low-savings households by about 8%, increases risk of over-drafting a bank account by 24%, and increases the risk of maxing out credit cards. It also reduces investment by about 14%—the implied effect is that each $1 of betting reduces investment by about $2.

This spending, moreover, appears to be relatively more common among the less well off. Households that have recently over-drafted their bank account spend three times as much on gambling as households that have not. And while low-income households spend less on gambling than high-income households, they spend much more as a share of their income—32% more in fact. As Baker et al. explain, 

the propensity of financially constrained households to increase their betting activity relative to their income suggests that the legalization of sports betting may exacerbate existing financial strains for these households.

The other study, by UCLA’s Brett Hollenbeck and colleagues, finds similarly alarming trends. They focus specifically on the effects of online sports betting, which delivers the ability to gamble straight to users’ browsers and phones. Online betting, specifically, is estimated to increase the risk of bankruptcy by 25 to 30 percent. Households in betting states also become more likely to become delinquent on auto and credit card loans, and have more debt in collections.

Hollenbeck et al. also find notable variation in who is most impacted by these financial problems. They show some suggestive evidence that young men (under 45) in low-income counties (a proxy for their unobserved income) are particularly affected, facing higher rates of bankruptcy and credit card delinquency, and more use of debt consolidation and unsecured loans.

Although we are still in the early days of the new sports-betting experiment, the preliminary evidence presented here—culled from two distinct data sets and two teams of authors—does not paint a pretty picture. Sports gambling legalization increases credit card debt, overdrafts, loan delinquencies, debt collections, and bankruptcies. These risks are concentrated among low-income households, with histories of shaky financial decisions, and particularly among young, plausibly low-income men.

This is exactly what one should expect from the commercialization of a highly addictive product like gambling. Sports books make most of their money off a small number of compulsive customers—in New Jersey, for example, about 5% of gamblers make 70% of bets. Innovations in advertising and app-based betting deliver ever-stronger reinforcement to users, pushing them to spend until they can’t anymore. The result is often financial ruin, depression, and even risk for suicide—outcomes that harms not only bettors, but their friends and families as well.

Against this backdrop, it’s hard to see exactly why legalizing sports betting was considered to be a good move. As I’ve noted elsewhere, in 2018, there were fewer than 3,000 arrests nationwide for any kind of gambling—prohibition did not mean locking very many people up. Rather, it kept big, predatory companies from extracting every ounce of profit they could out of newly-addicted consumers. Now, they can, and we are reaping the results. Can anyone really say it was worth it?

Charles Fain Lehman is a fellow at the Manhattan Institute and a contributing editor of City Journal.

1. Author’s note: see page 20 of the manuscript, where they estimate that legalization causes expenses to rise to $179/quarter, which is $716/year.