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Roland Eisenhuth, Dermot Murphy and Andreas Neuhierl

We examine the economics of casino gambling, a popular activity which represented 16.2 percent of US GDP in 2015. Departing from an expected utility framework, we present a model of stake-dependent utility for the gambler that generates positive gambling demand. Given this framework, we determine the odds chosen by the casino in competitive, monopolistic, and oligopolistic settings, and then examine the effect of taxation on the equilibrium odds and welfare. We endogenize the stake-dependent utility of the gambler using behavioral models of optimal expectations and cognitive dissonance and show that different gambler types self-select into different gambling games in equilibrium. Finally, we discuss a dynamic gambling model in which gamblers exhibit time-inconsistent behavior and display a tendency to “chase losses”.