Free market orthodoxy would have it that markets are self-correcting and strongly oppose government interventions. They reject the possibility of market failures and argue that such apparent failures arise from government regulations or thatthe market dynamics would correct these failures in due course.
This orthodoxy flies in the face of reality. The real world is full of examples where market dynamics left to itself creates distortions and perversities which persist for long times, if not forever. A friend pointed me to this article in Bloomberg on the corrosive social effects of online gambling in the UK.
UK was a pioneer in allowing online gambling in 2005. The market has since had a free-run attracting consumers and selling innovative products in a largely unregulated market. It's social costs are now becoming apparent and appear similar to the opiod problems in the US.
For four of the past five years, British punters have lost more than £14 billion on online casino games, sports betting and other forms of gambling. Fully 60% of the industry’s profits come from only 5% of its customers, according to a House of Lords’ report. As many as 138,000 people in England are classified by British regulators as problem gamblers, as well as 36,000 children aged 11-16, UK government statistics show. About 400 suicides — or around 8% of all suicides — in England are estimated to be linked to gambling each year, while it disrupts the lives of many more through broken marriages, bankruptcy, homelessness, and crime. During Covid, about 20% of higher-risk gamblers increased the time they spent gaming.
This explains how unregulated industry led to addiction,
The explosion in online gaming in the UK can be traced to the Gambling Act of 2005. Gambling firms were allowed to advertise sports betting, online casinos and poker on TV and radio for the first time, and until 2014 remote operators selling to British customers weren’t even required to hold a UK license. The law predated the technological revolution that was the smartphone. Betting firms have been exploiting that blind spot ever since, developing aggressive habit-forming games tailor-made for obsessive gambling, and cashing in while a significant subsection of their customers racked up huge losses, according to interviews with dozens of current and former employees, reformed addicts, lawmakers, consumer advocates, and academics. Firms including Bet365 Group Ltd., Ladbrokes and Paddy Power then enrolled their biggest losers into so-called VIP schemes and showered them with gifts that typically included free bets, cash deposits, tickets to sports games, flights to Las Vegas, and other inducements to keep them hooked.
On the nature of addiction and how betting companies promote this addiction,
Cooper would log in to games with names like Starburst, Gonzo’s Quest and Book of the Dead. Totally absorbed, he would lose track of time as he pressed the spin button, and the multiple reels covered in brightly colored symbols began to spin wildly. Cooper would gamble feverishly for hours without moving from his couch, sometimes wagering £100 per spin and only stopping once he’d burned through nearly all his money. He once gambled, and lost, a month’s wages in 20 seconds. If he hit a winning streak, he would gamble through the night, until his casino balance hit zero again and he stumbled to bed. Some days he would gamble for 12 hours straight, stopping only to go to the toilet or to eat...
But despite losing on average around £3,000 a month, Cooper says he only received one phone call from a gambling company checking that he was alright. None of the operators asked him if he could afford to lose that much, or checked the source of his wealth or income. But if he stopped gambling for longer than a couple of days — usually because he had lost nearly all his money and could barely scrape enough together to eat — then he would be bombarded with emails, text messages and phone calls offering him free bets, bonuses, and cash to return to their site.
With the social costs are now apparent and public pressure to tightly regulate the market and limit social damage mounting, the government has tried to intervene. But, given its profitability and well-entrenched market structure, the industry has responded with aggressive lobbying and other practices to stave off regulation. These other practices have included political capture of the most egregious nature,
Successive UK governments have done little to tighten the rules in the last decade, as an ever-increasing number of politicians have developed closer ties to the industry. Many lawmakers who have spoken out against increased regulation have also accepted thousands of pounds in hospitality from gambling companies, and regularly receive free tickets to top-flight sporting events, as well as lucrative speaking gigs and even second jobs, according to a Bloomberg News analysis of lawmakers’ financial disclosures. The government announced a review of gambling legislation in 2019, but has delayed publishing its findings at least four times. This summer, after intensive lobbying, officials in Boris Johnson’s administration watered down or removed several measures originally contained in the review, according to people familiar with the situation.
The gambling and horseracing industry has spent hundreds of thousands of pounds cultivating lawmakers of nearly every British political party, no matter who is in power. That lobbying has intensified since the end of 2019, when the ruling Conservative Party promised in its election manifesto a review of the 2005 Gambling Act. Since then, the sector has spent more than £300,000 on wages and entertainment for at least 37 UK lawmakers. On numerous occasions, they spoke in favor of the industry in parliamentary debates within weeks of being schmoozed in hospitality suites at sporting and social events.
In subsequent meetings with officials from the Gambling Commission and its overseers in government at the Department for Digital, Culture, Media & Sport, Prest and his colleagues discovered that the regulator was looking for something similar: It had told operators that it wanted an industry-wide tool to track their customers’ activity, known as a “single customer view.” It seemed a perfect fit. But the regulator, on a shoe-string annual budget of about £20 million, handed the job of selecting the most effective solution to the industry lobby group, the Betting & Gaming Council. The BGC told Prest and his partners at the firm they set up, called BetterRisk, that it was running the tender process and would invite them to submit their proposal. Prest says it struck him as odd that he kept being referred to the lobbyists, but he didn’t think much more of it at the time...
As they were applying the finishing touches earlier this year, though, the bankers received an email from the BGC: They would not even get to submit their proposal because the lobby group had picked Gamstop to help develop the new system. Ten months on, Prest is still extremely frustrated. He says it’s wrong “the industry gets to be the gatekeeper controlling the scope, design, functionality and delivery timeline of a harm-prevention system which is to stop harm that they themselves are causing by their commercial activities.”... Behind the scenes, gambling firms and their lobbyists meet with government officials on an almost weekly basis, according to documents obtained under Freedom of Information requests. In the 12 months to February, ministers and officials at the Department for Digital, Culture, Media & Sport met with representatives of the online gambling industry about 35 times, or around three times a month.
It's been reported about a proposal to regulate online gaming in India. The proposed regulation made the differentiation between games of skill and chance, and wanted to confine regulation to only the former. This was apparently overruled by the Prime Minister's office which wanted to regulate both. It may be the right thing to do.
It has been a consistent argument in this blog that corruption and venality are not restricted to developing countries and the public sector. They are inevitable whenever there is money involved. Thanks to the institutional strength and maturity, harassment corruption (on delivery of statutory public services, for example) is minimal or absent in developed countries. See this and this.
But in the case of the highest-value businesses, corrupt practices are common place in the west as in the east. In the former, it's less in the form of egregious bribery and more in the form of quid-pro-quo influence peddling to capture the rule makers, set rules of the game, and erect preferential policies. Given the stakes involved and the universality of human character, these practices are unavoidable. We need regulations to limit them.
In case of the private sector too, as long as the stakes are high and sufficient corporate governance restraints involving the principals (shareholders) and the agents (management) are not in place, there will be corrupt practices. The scale of such practices is likely to be bigger in the larger companies and those where the institutional restraints on senior executives is limited (for example, in companies with star chief executives). For sure, there is no loss of public resources, but these qualify as violations of fiduciary responsibilities. See this and this.
This paper describes how executive visits to the White House to meet the US President led to preferential policy changes that boosted the share prices of the company concerned.
Using novel data on White House visitors from 2009 through 2015, we find that corporate executives’ meetings with key policymakers are associated with positive abnormal stock returns. We also find evidence suggesting that following meetings with federal government officials, firms receive more government contracts and are more likely to receive regulatory relief (as measured by the tone of regulatory news). The investment of these firms also becomes less affected by political uncertainty after the meetings. Using the 2016 presidential election as a shock to political access, we find that firms with access to the Obama administration experience significantly lower stock returns following the release of the election result than otherwise similar firms. Overall, our results provide evidence suggesting that political access is of significant value to corporations.
This paper shows that Federal Reserve insiders systematically engaged in insider information trading with financial market actors the day before FOMC meetings.
In this paper, I employ anonymous New York City yellow taxi records to infer variation in interactions between insiders of the Federal Reserve Bank of New York (New York Fed) and insiders of major commercial banks around Federal Open Market Committee (FOMC) meetings. Taxi rides between the vicinities of the New York Fed's and the major commercial banks' buildings serve as indicators of meetings at those institutions, and coincidental drop-offs of passengers picked up around those institutions serve as indicators of offsite meetings. Cieślak, Morse and Vissing-Jørgensen (2016) posit systematic leakage from the Federal Reserve around FOMC meetings along unofficial channels, and, in line with that hypothesis, I find highly statistically significant evidence of increases in meetings at the New York Fed late at night and in offsite meetings during typical lunch hours.
There are too many examples of fiduciary failures and criminal conduct in private sector in India and elsewhere to worth specifically linking them.
Finally, in all these cases, developed or developing country, public or private sectors, despite all institutional restraints and management-speak, the absence of corrupt practices boils down to the character of the individuals concerned.
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