The cost of living varies as much across locations as it does over time. We demonstrate the importance of considering locational cost of living differences in empirical models of the demand for state lotteries. Previous research has shown that the nominal-income elasticity of demand for lottery tickets is less than one, suggesting that individuals and geographic regions with lower incomes tend to have a greater percentage of their income allocated toward lottery ticket purchases than do wealthier individuals and geographic regions. We first provide a conceptual framework that reveals that real-income elasticities generally will be different from nominal-income elasticities. We then reestimate traditional cross-sectional models of lottery demand using a sample of metropolitan statistical areas. We find that the magnitude of income elasticity estimates is smaller when local cost of living is omitted from empirical models, especially in the case of instant lottery games.
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