Online Gambling Ban Doomed to Fail

With the steady rise of commercial activity on the Internet, Congress has been moving toward a formal prohibition of online gambling (search).

While such policies might spring from a moral viewpoint, they are unlikely to succeed in limiting online betting. Because Internet gaming operations are often located outside of the U.S., there is little Washington can do to restrict their actions.

Moreover, a prohibition policy has perverse effects and encourages the behavior it seeks to curtail. This is illustrated by a close examination of one of the most popular forms of gambling: sports betting. There is a large demand for sports betting (search), and a large illegal sector has arisen to provide this activity despite a long-standing policy of prohibition. A similar ban on all Internet-based sports betting also is likely to fail. A legalized regime is a better way to mitigate the potential dangers of Internet betting.

To begin, let's take a closer look at betting on major sports, which is currently illegal in all states besides Nevada, regardless of whether it involves the Internet. While these bans are primarily enforced by states, the federal government does get involved if wagers cross state lines or there is an alleged involvement of organized crime. So how successful has this regime of prohibition been at eliminating sports betting? By almost any measure it is a failure. A recently completed report from the National Gambling Impact Study Commission (search) estimates that individuals wager between $80 and $380 billion dollars with illegal bookmakers. This is nearly 100 times the amount bet on professional sports with legal bookmakers in Nevada.

The sheer size of the illegal sports betting markets only tells part of the story. I recently completed an analysis of illegal bookmakers (search) in New York City using actual records seized in a series of arrests by the Kings County (Brooklyn) District Attorney office. I found that illegal bookmakers utilize policies that exacerbate the potential harm of gambling. First, they offer short-term credit, and allow bettors to wager for a week or longer without fronting any money. Most of the bettors in my records would be considered compulsive gamblers (search), wagering almost every day and laying hundreds of dollars at a time.

Second, illegal bookmakers take advantage of people's mistakes. They know that many bettors are fans of certain teams. In the case of the bookmakers I have records for, about a quarter of the bettors appear to be New York Yankees fans who wager consistently on their team. The bookmakers understand this tendency and "price discriminate" (search) against such bettors: They charge them a higher price for their Yankees bets. While price discrimination does have an important role to play in free markets, it is likely that consistent use of it would be precluded if sports betting was legalized and above-board.

Right now, Internet gambling is proliferating. Internet operations catering to U.S. citizens operate from bases in countries as diverse as Antigua, Costa Rica and Australia.

Presuming the current attempts at prohibiting Internet sports betting persist, what might we expect to see? First, there will be a growing alliance between Internet bookmakers and the more traditional illegal bookmaker. The on-street bookmakers have experience in providing and servicing financial credit, which would be difficult for the Internet books to provide given the difficulty of enforcing a debt contract from afar. There is already evidence that Internet operations have started to pay their illegal on-shore cousins to run their credit business. Such interaction will help reinforce the influence of the illegal sector and will exacerbate the perceived problems of sports betting, such as facilitating money laundering.

Second, prohibition will drive the Internet operators further from the U.S. An important feature of the Internet is that it makes physical distance largely irrelevant, and from a bettor's perspective it is just as convenient to wager on-line with an Antigua bookmaker as with one down the street. As bookmakers move further from U.S. soil to escape its influence, it will become harder and harder to legalize Internet gaming in the future as the bookmakers get ensconced in their offshore locations.

A far more sensible policy would be to legalize Internet bookmakers. This would allow policies to be put in place that could limit the potential excesses of gambling and minimize the role of the criminal element. As side benefits, a legalized regime would likely displace the widespread illegal operations. It is perhaps understandable that such an option is rarely considered. Gambling is a subject that many feel passionately about. But the argument for legalization and regulation should have appeal for opponents and supporters of gambling alike.

Koleman Strumpf, associate professor of economics at the University of North Carolina-Chapel Hill, is a visiting fellow at the  Cato Institute.