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Estimating the Effect of Unearned Income on Labor Earnings, Savings, and Consumption: Evidence from a Survey of Lottery Players

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  • Guido W. Imbens
  • Donald B. Rubin
  • Bruce I. Sacerdote

Abstract

This paper provides empirical evidence about the effect of unearned income on earnings, consumption, and savings. Using an original survey of people playing the lottery in Massachusetts in the mid-1980s, we analyze the effects of the magnitude of lottery prizes on economic behavior. The critical assumption is that among lottery winners the magnitude of the prize is randomly assigned. We find that unearned income reduces labor earnings, with a marginal propensity to consume leisure of approximately 11 percent, with larger effects for individuals between 55 and 65 years old. After receiving about half their prize, individuals saved about 16 percent.

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 91 (2001)
Issue (Month): 4 (September)
Pages: 778-794

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Handle: RePEc:aea:aecrev:v:91:y:2001:i:4:p:778-794

Note: DOI: 10.1257/aer.91.4.778
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  1. Charles T. Clotfelter & Philip J. Cook, 1989. "The Demand for Lottery Products," NBER Working Papers 2928, National Bureau of Economic Research, Inc.
  2. Ashenfelter, Orley & Heckman, James J, 1974. "The Estimation of Income and Substitution Effects in a Model of Family Labor Supply," Econometrica, Econometric Society, vol. 42(1), pages 73-85, January.
  3. Johnson, Terry R & Pencavel, John H, 1984. "Dynamic Hours of Work Functions for Husbands, Wives, and Single Females," Econometrica, Econometric Society, vol. 52(2), pages 363-89, March.
  4. Orley Ashenfelter & John C. Ham, 1979. "Education, Unemployment and Earnings," Working Papers 501, Princeton University, Department of Economics, Industrial Relations Section..
  5. Farrell, Lisa & Walker, Ian, 1999. "The welfare effects of lotto: evidence from the UK," Journal of Public Economics, Elsevier, vol. 72(1), pages 99-120, April.
  6. Killingsworth, Mark R. & Heckman, James J., 1987. "Female labor supply: A survey," Handbook of Labor Economics, in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 1, chapter 2, pages 103-204 Elsevier.
  7. Charles T. Clotfelter & Philip J. Cook, 1989. "Selling Hope: State Lotteries in America," NBER Books, National Bureau of Economic Research, Inc, number clot89-1, July.
  8. Jerry A. Hausman & David A. Wise, 1985. "Technical Problems in Social Experimentation: Cost versus Ease of Analysis," NBER Chapters, in: Social Experimentation, pages 187-220 National Bureau of Economic Research, Inc.
  9. Holtz-Eakin, Douglas & Joulfaian, David & Rosen, Harvey S, 1993. "The Carnegie Conjecture: Some Empirical Evidence," The Quarterly Journal of Economics, MIT Press, vol. 108(2), pages 413-35, May.
  10. MaCurdy, Thomas E, 1981. "An Empirical Model of Labor Supply in a Life-Cycle Setting," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1059-85, December.
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