The legalization of casino gaming is often viewed as a means to increase the amount of economic activity within a region. The mechanisms by which casinos impact economic activity are complex. Broadly speaking, there are three channels by which casino development affects economic activity within a region. This study classifies these as the destination, recapture and substitution effects. The three effects refer to the potential origins of gaming revenues for the new casino.
Destination Effect: The legalization of casino gaming draws visitors from outside of the host region. Spending by casino patrons from outside the region increases the aggregate amount of economic activity within the region.
Recapture Effect: The legalization of casino gambling reduces the propensity of residents of the host region to engage in gaming activities outside of the region.
Instead, these individuals patronize casino gaming venues within the host region.
Substitution Effect: The legalization of casino gaming causes a reallocation of expenditures by individuals within the region. The increased expenditures by residents of the region cause a decrease in expenditures on other forms of consumption or in net savings.
The regional economic effects of casino development are specific to the circumstances of a particular region and the type of development.
1. Destination Effect
Casino facilities are often designed and marketed to draw patrons from other parts of the country.
That is, to create a destination to attract visitors from other places. Of the three effects cited above, the destination effect has the largest positive net impact for the region hosting the casino development. In addition to the gaming and non-gaming revenues that casino developments earn from visitors from outside the region, local business also benefit from spillover effects.
Expenditures by visitors from outside the region will create additional jobs at restaurants and bars, hotels and convention facilities, and in the transportation sector. In the context of the
Massachusetts casino developments, the destination effect involves the attraction of patrons from other states and abroad to the casino facilities.
The destination effect is generally greater for large scale casino developments and lower for riverboat casinos, slot parlors and card rooms. Resort casino complexes offer a range of different activities in addition to gaming including rooms, restaurants and convention facilities.
The largest destination casinos offer facilities that cater to families and individuals that do not necessarily patronize the gaming facilities at all. These casinos often contract with well-known entertainment acts, creating economic impacts to the region not derived from gaming activity.
Destination casinos have the maximum economic impact on a region. A larger fraction of total patrons at destination casinos are drawn from outside of the region than with other forms of casinos. The larger the portion of patrons drawn from outside of the region, the greater the amount of new economic activity and the lower the substitution effect.
The destination effect is also stronger if a region possesses complementary man-made or natural resources to attract patrons from outside of the region. While Atlantic City was experiencing economic decline at the time that casino gambling was legalized in 1978, it also possessed certain advantages as a destination location due to its long history of a resort area and its proximity to the Atlantic Ocean. Other locations that have introduced some form of commercial casino gaming that have long traditions as resort areas include New Orleans, LA; the Mississippi gulf coast and the area around Niagara Falls, NY.54
Economic benefits from the legalization of casino gaming have also been important in regions experiencing economic difficulty. The desire to increase economic opportunities on Indian reservations was a primary consideration of Congress in the passage of the Indian Gaming Regulatory Act of 1988.55 Many regions that have legalized commercial casino gaming such as Detroit, MI; Gary, IN; East St. Louis, IL; Shreveport, LA, Tunica County, MS and Atlantic City,
54The Canadian side of the region includes the Fallsview Casino Resort and Casino Niagara. The Fallsview has 3,000 gaming machines, 30,000 square feet of convention space, 374 rooms, and is the largest casino in Canada by employment (5,000 employees). The Seneca Niagara Casino and Resort, a tribal casino, is located in Niagara Falls, NY. The Seneca Niagara casino has over 4,000 gaming machines, 30,000 square feet of convention space, 604 rooms and employs 3,000. Casino City, North American Gaming Almanac.
55 Indian Gaming Regulatory Act, 25 U.S.C. §2702.
NJ did so because they were experiencing economic difficulty. Such areas have limited options to attract capital or tourist dollars.
2. Recapture Effect
The development of a casino gaming venue will cause some residents that had patronized casinos out of state to shift their expenditures to the new in-state facilities. When given a choice, casino patrons tend to visits casinos that are located closer than further away.56 Engaging in casino gambling at a more distant venue involves greater expenditures of time and money to travel to the facility. Research on consumer behavior demonstrates that demand for casino gaming decreases with the distance between the casino and a population center and with the availability of local casino gaming alternatives.57
The recapture effect results in an economic benefit to the home region. Expenditures on gaming and other services that had been formerly made outside of a region are instead made in the region with the new casino development. The shift in the pattern of gaming activity to the home region results in an increase in employment and income.
In the case of casino development in Massachusetts, the recapture effect refers to the expected shift of Massachusetts residents away from patronizing casinos in Connecticut, Rhode Island and other locations and towards Massachusetts casinos when in-state casino gaming options become available.
3. Substitution Effect
The addition of a casino provides residents of a region with another option for consumption.
Some consumers within the region will choose to spend dollars and time at the casino instead of other places. The tendency of individuals within a region to shift their spending to another form of consumption when a new alternative becomes available is referred to as the substitution effect.
Increased expenditures on casino gaming by residents of the region may be accompanied by a
56 Kilby, Fox & Lucas, Casino Operations Management, 280-281.
57 Richard Thalheimer and Mukhtar M. Ali, “The Demand for Casino Gaming,” Applied Economics, 35 (2003): 907-919.
decrease in other forms of leisure spending such as spending at local bars, restaurants and entertainment venues.
The effect of the increased expenditures on casino gaming may also impact other forms of consumption spending. This impact is hard to measure given that even a very large casino is usually only a small part of overall consumer spending in a region. The substitution of casino gaming for other forms of local consumption represents a shift in economic activity to the casino from local businesses. In general, casino gaming formats that are designed to attract local patrons—such as riverboat and dockside casinos—have the largest negative impact on local business per dollar of gaming revenues generated. Because of the larger draw of patrons from outside of the region, destination casinos tend to have the smallest negative impacts on local non-casino business per dollar of GGR generated.
The introduction of casinos expands the alternatives available to consumers in a region.
Economic theory suggests that consumers choose to purchase the set of goods and services that allows them to derive the highest level of enjoyment. If a new consumption possibility is added, consumers will only expend dollars on that activity to the extent that the benefits that they derive exceed the benefits from their next best alternative.58