Home About Latest Browse RSS Advanced Search

Federal Reserve Bank of Philadelphia
Working Papers
Does inequality cause financial distress? Evidence from lottery winners and neighboring bankruptcies
Sumit Agarwal
Vyacheslav Mikhed
Barry Scholnick
Abstract

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.


Download Full text
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 19 Oct 2016.
More from this series
JEL Classification:
Subject headings:
Keywords: Income inequality; Bankruptcy; Conspicuous consumption; Lottery; Financial distress
For corrections, contact Beth Paul ()
Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

Privacy Legal