This thesis will examine the free rider problem in a unique setting: how states compete over gambling revenues. As the economy tightens, states continue to look for revenue streams to supplement their already strained budgets. Gambling is an attractive option for many states, as it is a steady and reliable source of income each month. With appealing funds available, different states have intensified their competition, authorizing new casinos on neighboring state borders to entice out-of-state visitors. States receive money from these visitors but are not responsible for their social problems, which they bring back to their home states. This phenomenon is a modern incarnation of the free rider problem. This paper explores three main questions. To begin, does the gambling market expand with the introduction of a new state's gambling facilities? Next, are states able to successfully reclaim revenues? Lastly, what are the effects of changes in tax rates on state revenues? These questions are examined in two regions. First, the newly authorized slots in Pennsylvania are having a direct impact on the casinos in Atlantic City, NJ. Also, a variety of tax changes in the Midwest states of Illinois, Indiana, and Missouri is shifting revenues among these three states. The free rider problem relating to states and gambling will continue to be an important and relevant issue for years to come.
