Koleman S. Strumpf analyzes six Illegal bookmakers who operated at various points over the period 1995 to 2000 in or nearby New York City. The study examines illegal betting markets, how bookmakers run their daily operations and how do they deal with the fact that legally binding contracts are not possible. The data used in this study were gathered from the Kings County District Attorney office, court documents associated with each case and the FBI.
Abstract
This paper provides an economic analysis of illegal sports bookmaking using detailed records from six bookmakers who operated in the 1990s. These operations are structured like standard firms and utilize incentive contracts to induce appropriate employee behavior. The bookmakers offer prices which closely follow the geographically separated legal market, but larger operations price discriminate based on individual betting patterns. Despite the availability of inexpensive hedging instruments, all operations take on substantial financial risk. This implies the bookmakers cannot be risk-averse and must hold large cash reserves. The risk-adjusted profit rate is lower than in legal financial markets. These results and behaviors are consistent with standard models of economic self-interest.
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