The Impact of Casino Gambling on
Personal Bankruptcies

A new study conducted by the Credit Research Center at Georgetown University's McDonough School of Business examines the role that casino gambling may have played in explaining the rise in personal bankruptcies. If you have a business interest in providing consumer loans you already know that personal bankruptcies soared in the U.S. between 1994 and 1998. Nearly 1.4 million U.S. households filed for bankruptcy protection in 1998, about a half million more than in 1995. Bankruptcy filings fell back about 8% in 1999 to 1.26 million, but the level was still dramatically higher than at the the beginning of the decade, at the peak of the last expansion. Why this occurred against the backdrop of the most favorable economic conditions in a half-century has challenged researchers and spurred Congress to consider legislative remedies.

Although debtor surveys consistently find that the majority of bankruptcies are triggered by insolvency events (e.g., layoffs, failure of small business, divorce, extended illness), an explanation for the rise in bankruptcies during the 1990s that is built around a comparable rise in insolvency events is inconsistent with the economic facts. However, one activity which can precipitate personal financial crises and has also experienced growth as dramatic as personal bankruptcies over the past decade is the volume of commercial gaming, especially casino gambling. Consumer spending (total amount wagered minus total payouts) on all forms of commercial gaming in the U.S. reached a record $54.3 billion in 1998, up from $39.8 billion as recently as 1994. Casino gambling was the primary driver behind this dramatic growth, accounting for 56% of gross gaming revenues in 1998.

Prior to 1989, the only casinos in the U.S. were located in Nevada and New Jersey. In October of 1988, Congress passed the Indian Gaming Regulatory Act permitting casino gambling on Native American land. By 1998 gambling at reservation casinos represented 15% of total consumer spending on casino gambling nationwide. The first riverboat casino license was issued by the Iowa legislature in March 1989. Competition among states for gambling tax revenue and economic development dollars prompted Illinois, Mississippi, Louisiana, and Missouri to legalize riverboat casinos between 1990 and 1993. Further expansion occurred in the 1990s with the proliferation of electronic gaming devices such as slot machines and video poker machines outside of casinos to racetracks, bars and arcades in various states across the country.

Authors John Barron, Michael Staten and Stephanie Wilshusen at the Credit Research Center built a statistical model to determine the impact that casino gambling growth may have had on county-level bankruptcy filing rates after controlling for other factors such as insolvency events and household debt levels. The model is built on the authors' prior work summarized in previous issues of Spotlight on Finance. Specifically, the model uses several unique databases to estimate county-level bankruptcy filing rates from 1993 to 1998 for over 3,000 U.S. counties. Filing rates are estimated as a function of county-level variables that measure 1) household decisions to use more debt relative to income, 2) the incidence of (and vulnerability to) unexpected declines or increases in income and expenses, and 3) social/economic stigma that accompanies filing for personal bankruptcy. Variables in the first category include household income as well as credit variables from Trans Union's TrenData database tool. The credit variables include variables such as the number of debtors per household, average mortgage and non-mortgage debt per debtor, and the number of revolving accounts per user. Variables in the second category include the volume of casino gambling in a county as well as unemployment rate, proportion of individuals divorced or separated, the proportion of households with at least some health insurance, etc. Variables in the third category measure population density, and factors such as the availability of an unlimited homestead exemption in Chapter 7 bankruptcy, and whether or not wage garnishment is prohibited.

Prior research has shown a significantly higher incidence of pathological gambling behavior in areas within 50 miles of casinos. Consequently, there is reason to expect that the presence of a casino may impact the financial stability of households within a 50 mile radius. Since this "impact area" often extends well into counties adjacent or near the county hosting the casino, the authors identified a set of 375 "collar counties" that were either adjacent to the 59 casino counties in the study or had borders falling with 50 miles of the casino location. The nearby chart displays the location of casino and collar counties across the U.S. With one exception (Connecticut) no Indian casino activity was measured in the study because data were not available.

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The authors found that, controlling for other factors, the volume of casino gambling is directly related to the bankruptcy filing rate in areas that have casinos nearby. Interestingly, the upward influence on bankruptcy filing rates associated with proximity to casinos declines with distance: bankruptcies in collar counties were less responsive to gambling revenues than were bankruptcies in casino counties themselves. To quantify the effect, suppose there had been no growth in casino gambling activity during the years in which bankruptcy filings escalated, i.e., casino revenues were held at 1994 levels. The model suggests that bankruptcy filing rates in 1998 would have been 3.9% lower in counties that hosted or were adjacent to casinos but only 0.7% lower nationwide. (See nearby chart). Put another way, the model indicates that about 9,500 fewer petitions would have been filed nationally in 1998 had gambling growth been flat between 1994 and 1998. The authors conclude that the local impact of casino gambling is far more pronounced than the influence of casino gambling on national filing rates.

One important qualifier: the study was designed to test the local-level influence of gambling activity on bankruptcy incidence. Given the volume of tourist trips to gambling destinations such as Las Vegas and Atlantic City and the more recently developed casino complexes along the Gulf Coast, it is possible that some of the ill effects of casino gambling are exported back to the counties where tourists reside. The variables in the study do not capture this effect if the tourist lives far away from a casino. Consequently, the model is silent on how much the growth in casino gambling during the 1990s may have influenced the national filing rate, other than the influence exerted by filings in the 434 casino and collar counties themselves.

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