ON THE OPTIMAL DESIGN OF LOTTERIES

In recent years, the expected utility model of choice under risk has been generalized to cope with phenomena such as probability weighting. In the present paper, one such generalized approach, the rank-dependent expected utility model, is applied to the problem of lottery gambling. The model is used to derive an optimal prize structure for lotteries, ivolving a few large prizes and a large number of small prizes. Other forms of gambling, such as racetrack betting, are discussed in the light of this result. Copyright 1991 by The London School of Economics and Political Science.

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