How Does Your Lottery Win Affect your Neighbors?

By Ben Hamill - May 02 2016
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How does your lottery win affect your neighbors? According to research conducted by the Philadelphia Federal Reserve, a branch of the Central Bank of America, there is a significant correlation and it’s not necessarily in your neighbors’ favour. That’s because the survey shows that people who live next to recent lottery winners are more likely to go bankrupt.

 

Going Bankrupt

The study presents data to show that for every $1,000 a neighbour wins in the lottery, there’s a 2.4 percent chance that the winner’s neighbours will go bankrupt over the course of the next two years. Researchers for the Philadelphia Fed examined Canadian information, since that data is more centralized and accessible than similar data from American lotteries. Canvassers collected data from the provincial lottery boards and compiled a list of every Canadian who won at least $1,000 in a lottery between April 1 2004, and March 31, 2014. All totaled, the list included 6,578 people.

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The list was then cross-referenced against data from the Office of the Superintendent of Bankruptcies — the office that compiles the names of individuals who declare bankruptcy in Canada. In the results, a correlation was found between bankruptcies and neighbors who won the lottery.

 

Theories

In trying to theorize why this occurred, economists said that people who saw the good fortune of their lottery-winning neighbors felt pressured to accumulate assets in order to “keep up.” These assets could include smaller-ticket items such as TVs or garden projects as well as large-ticket items including luxury cars and extensive remodeling projects. Economist Sumit Agarwal, professor at theNational University of Singapore, Barry Scholnick, professor at theUniversity of Alberta and Vyacheslav Mikhed, employee at the Philadelphia FedPayment Cards Center, wrote that "income inequality induces poorer neighbors to consume more visible (rather than invisible) commodities to signal their abilities to ‘keep up with the Joneses' to their richer neighbors. This tendency can lead to additional and unsustainable borrowing among the relatively poor to finance this additional conspicuous consumption, which can eventually result in financial distress and bankruptcy."

 

Scholnik, Vyacheslav and Nikhed initially circulated their research in a Philadelphia Fed working paper. They did not name the Canadian province which was studied.

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Data

In their study the researchers analyzed bankruptcy filings and lottery prizes according to postal codes that, on average, contained up to 13 households. “These areas are extremely small, often smaller than a city block in size,” the analysts wrote, in explaining their decision of how they would collect their data.“Single apartment buildings, for example, can have multiple six-digit postal codes.”

The researchers examined neighborhoods in which one neighbor had won the lottery. Cases in which lottery winners themselves declared bankruptcy were excluded. Lottery winnings that involved fixed-payout lottery prizes and extremely large jackpots were also eliminated.

 

The main finding was that, for every $1,000 increase in the lottery prize, a 2.4% increase in bankruptcy filings by the winner's neighbors occurred over the course of the following few years. Over a two-year window following a lottery win, there was a base case of 0.46 bankruptcies within the same postal code.

The researchers also discovered that the results were more pronounced in low-income neighborhoods, especially in areas of high income-inequality.

 

What’s Going On?

Why would a neighbor’s lottery win cause someone living down the street to go bankrupt? The researchers theorized that people who feel they are poorer than their peers may feel compelled to spend in a more conspicuous fashion. Since they don’t have the funds to make the purchases they finance through debt, leading them to financial difficulties and, in the worst case scenario, bankruptcy.

In their report Mikhed, Scholnick and Agarwal analyzed the Canadian bankruptcy data and found "evidence that those who filed for bankruptcy after a larger lottery win of a close neighbor have significantly larger holdings of visible assets (e.g., cars, motorcycles, houses) relative to the holdings of these same visible assets by those who filed for bankruptcy after smaller lottery wins of a close neighbor." To lend credence to the theory that people bought to “keep up with the Jones” the report noted that “the size of lottery prizes increases the value of visible assets [houses, cars, motorcycles but not invisible assets [cash and pensions].”

Researchers noted that even small lottery wins can start a trajectory in which neighbors start to overspend. Jackpots of more than $150,000 were excluded from the research, yet the effect of having a neighbor who had won even a few thousand dollars was pronounced — the lottery winner’s neighbors overspent proportionally more than in other scenarios.

Test Group Vs. Control Group

Data was compared from the text group, which shared a postal code, to data from a control group — approximately 200 households that were located within a short distance of the test group. In low-income neighborhoods the results were noticeable and demonstrated the effect that a neighbor with a lottery win has on the consumption habits of the people living in close proximity. “Because this increased consumption of the poor will likely be financed by debt, this will eventually lead to financial distress for these poorer individuals,” the report said.

Lottery Winners

Lottery winners themselves were not immune from the problem of overspending after their win. When the researchers looked at the 6,578 lottery winners themselves, they found that 824 of them were forced to declare bankruptcy within ten years of their win. “The larger the magnitude of a lottery prize, the larger the value of conspicuous assets on the balance sheets” the study’s authors wrote.

Lottery Research

Economic research on the causes and effects of income and wealth inequality has a great deal to mull, thanks to Mikhed, Scholnick and Agarwal’s demonstration of the "causal evidence on the link between income inequality and financial distress.” The study also adds to the growing use of lottery winner data that examines the economic and social effects of sudden income windfalls.

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