Consumption, Savings, and Earnings Responses to Financial Windfalls

Chakrabarti, Rajashri; Kroft, Kory; Kulkarni, Sheisha; Mikhed, Vyacheslav; Notowidigdo, Matthew J.; Raina, Sahil; Scholnick, Barry; d'Astous, Philippe

doi:10.59576/sr.1208

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Consumption, Savings, and Earnings Responses to Financial Windfalls

Abstract: We estimate the causal effects of a financial windfall on consumption, savings, and wage earnings using linked administrative data on a large sample of Canadian lottery winners. Using separate linkages of lottery winners to income tax records and credit bureau data, we estimate how lottery winnings affect consumption measured through credit card spending, savings through financial asset accumulation and debt repayment, and wage earnings from tax records. We then examine how these responses vary across the income distribution. We find that high-income individuals allocated a larger share of lottery winnings to savings and leisure, while low-income individuals spent a larger share on consumption. We illustrate the policy relevance of these heterogeneous responses through three applications: designing fiscal stimulus programs, evaluating a Universal Basic Income (UBI), and determining optimal top tax rates on wage earnings and savings.

JEL Classification: D12; D15; E21; E62; H2; J22;

https://doi.org/10.59576/sr.1208