Federal Reserve Bank of Philadelphia
Does inequality cause financial distress? Evidence from lottery winners and neighboring bankruptcies
Revised Oct 2016. We test the hypothesis that income inequality causes financial distress. To identify the effect of income inequality, we examine lottery prizes of random dollar magnitudes in the context of very small neighborhoods (13 households on average). We find that a C$1,000 increase in the lottery prize causes a 2.4% rise in subsequent bankruptcies among the winners’ close neighbors. We also provide evidence of conspicuous consumption as a mechanism for this causal relationship. The size of lottery prizes increases the value of visible assets (houses, cars, motorcycles), but not invisible assets (cash and pensions), appearing on the balance sheets of neighboring bankruptcy filers.
Cite this item
Sumit Agarwal & Vyacheslav Mikhed & Barry Scholnick, Does inequality cause financial distress? Evidence from lottery winners and neighboring bankruptcies, Federal Reserve Bank of Philadelphia, Working Papers 16-4, 11 Feb 2016, revised 21 Oct 2016.
- C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
- D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
- K35 - Law and Economics - - Other Substantive Areas of Law - - - Personal Bankruptcy Law
Keywords: Income inequality; Bankruptcy; Conspicuous consumption; Lottery; Financial distress
This item with handle RePEc:fip:fedpwp:16-4
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