This paper explores the effect on lotto demand of background risk. A cubic utility function model is adopted to analyze the willingness-to-pay of a bettor with background risk. First, a necessary condition is derived for bettor’s willing to buy a lotto ticket. Then, for these willing bettors, a sufficient condition is given for their purchasing more lotto tickets after introducing an independent pure background risk. The condition consists of two effects, one determined by the change of the bettor’s absolute risk aversion and the other determined by an interplay of changes of the bettor’s absolute risk aversion and absolute prudence. It is further checked that the “standard risk aversion” condition—decreasing absolute risk aversion plus decreasing absolute prudence—cannot unambiguously sign the comparative statics. In the empirical part, a Taiwan data set is used to explore the effect on household lotto expenditure of background income risk. Using four alternative proxies for income risk, we find that households with more income risk purchase fewer lottery tickets, after controlling other factors including income, wealth, and the age of the head of the household.
