NEWS

Economist at UNC carries out first in-depth study of illegal bookmakers

By DAVID WILLIAMSON
UNC News Services

CHAPEL HILL -- Economists, entrepreneurs, business school faculty members and others often study major businesses to see what lessons they can learn, but almost without exception, they have ignored one of the nation’s largest enterprises -- illegal sports bookmaking.

Now, Dr. Koleman S. Strumpf, associate professor of economics at the University of North Carolina at Chapel Hill, is helping fill gaps in knowledge of what surely must be one of the world’s oldest professions.

"I got interested in the topic because illegal sports bookmaking is a huge racket," Strumpf said. "Estimates I saw in a recent national gambling impact commission study were that people wager between $80 billion and $380 billion a year in this country. It’s a big, big business."

No wonder the industry, illegal in most states, is so little known, he said. Until now, getting accurate information about it has been almost impossible.

In 2000, Strumpf got lucky. He developed contacts in and cooperation from the Kings County District Attorney’s Office in Brooklyn, N.Y., which, with police help, periodically arrests bookies. He believes the resulting project, based on extensive files from six cases from 1995 to 2000, is the largest and most systematic academic study ever done of the subject. In total, Strumpf analyzed more than $10 million in bets from operations as large as the leading Las Vegas bookmakers.

"They gave me access to a lot of records from recently resolved cases that contained much extremely specific information about the bookmakers, including address books listing where people lived, records about what prices they set, people’s debts to bookmakers, wagers paid -- all sorts of really interesting information," the economist said.

Not surprisingly, it turns out that illegal bookmakers tend to be big gamblers themselves and often bet between $20,000 and $30,000 on individual games, Strumpf said. Although police he talked to knew of none who had failed financially, their profit margins were small and did not match what they could make by investing conservatively in legitimate markets.

"To me, one interesting thing was how these guys maintain contact with customers without getting caught by the cops more often," he said. "They set up a very corporate-like structure in which they have minimal or no contact with customers. Intermediate employees serve as go-between with the bettors."

For example, one organization led by two men had about 250 gamblers, none of whom the two leaders dealt with personally. Go-betweens channeled gamblers into the organization and transferred money back and forth so that the top people minimized the danger of getting caught. This operation handled between $150 million and $200 million in bets a year. To give a sense of its magnitude, if that organization were a public company, its sales would rank among the 2,000 largest in the United States.

"The smaller bookmakers have few if any outside employees, and they have frequent personal contact and familiarity with their bettors," he said. "Part of this familiarity stems from a relatively stable client base."

By matching addresses with U.S. Census information, Strumpf found two-thirds of bettors lived within two miles of their small-scale bookmaker or a near major thoroughfare that allowed quick access. Four-fifths of the bettors in one book, all white Italian-Americans, lived in tracts whose residents resembled the bookmaker. In that operation, he found no women bettors.

"This common background enhances trust within small bookmaking operations," he said. "Bookmakers have to trust their bettors to repay their debts and to not contact the police. It is easier to monitor and trust a small group of individuals who live nearby, have frequent personal contact and come from a similar ethnic background. An outsider who lacks one or more of these traits and wants to become a bettor is likely to be turned away."

One operation he studied included as employees the bookmakers’ three sons, a brother-in-law and an ex-wife. "Such a close-knit group helps reduce the chance of theft or arrest," he said.

Another finding was that violence toward bettors, even those with significant debts, was rare, contrary to popular lore. Still another was that bookmakers tend to make good money from home teams since, not surprisingly, people like to bet on teams that play near where they live.

"Records from one of the large bookmakers in New York during the baseball season showed gamblers were willing to spend 4.2 cents on the dollar to bet on the Yankees," Strumpf said. "That might not sound like a big number, but that’s twice as large as the usual commission on baseball games. In the long run, if he does lots and lots of gambles, the bookmaker is going to make significant money out of that."

Sports books in New York operate almost in lockstep with oddsmakers in Las Vegas, Nev., which is the only state in the nation that allows sports gambling, he said. To do otherwise would be foolish.

"It’s basic economics," Strumpf said. "Suppose a bookmaker in New York says that Team A is a 20-point underdog in basketball, and in Las Vegas, Team A is a 20-point favorite. A smart bettor with access to both markets could make money either way the game came out."

An underlying theme of the working paper Strumpf expects to publish in a peer-reviewed journal is that the illegal sports bookmaking industry functions by principles one would expect to learn in an introductory college economics course, he said.

"In a lot of ways, these guys are behaving in a textbook example of a free market with no government regulation," he said. "There is a low chance of them being arrested, and if they are arrested, there is almost no chance that they will go to jail."

In his analysis, the UNC professor found numerous parallels with standard commercial companies, including incentives to reward productivity and price discrimination based on individual betting patterns.

"Despite the availability of inexpensive hedging instruments, all operations take on substantial financial risk," he said. "This implies that bookmakers cannot be risk averse and must hold large cash reserves.

"The risk-adjusted profit rate is lower than in legal financial markets," Strumpf said. "These results and behaviors are consistent with standard models of economic self-interest."

Illegal sports betting nationwide is comparable in size to how much people spend on illegal drugs, and it is growing very quickly, Strumpf said.

"The illegal market dwarfs the legal one, with only 1 to 3 percent of all sports wagers being placed in the legal Nevada market," he said.

Strumpf believes his work will help inform policy debates on the future of sports gambling.

"First, the results cast doubt on the conventional wisdom that all bookmaking will soon be conducted over the Internet," he wrote. "Many of the bettors observed here would be unable to place an Internet wager simply because they cannot operate a computer. Another factor is the lack of financial credit with Internet bookmakers. This policy is unlikely to change given Internet bookmakers’ impersonal relationship with bettors and their lack of legal recourse against bettor default."

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Note: Details are available at http://www.unc.edu/~cigar/papers/Bookie4b.pdf. Strumpf can be reached at (919) 966-4485 or cigar@unc.edu. E-mail contact will be better between June 18– 28, 2003.

Contact: David Williamson, (919) 962-8596