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The Own and Social Effects of an Unexpected Income Shock: Evidence from the Dutch Postcode Lottery

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  • Kuhn, Peter J
  • Kooreman, Peter
  • Soetevent, Adriaan
  • Kapteyn, Arie

Abstract

In the Dutch Postcode Lottery a postal code (19 households on average) is randomly selected weekly, and prizes--consisting of cash and a new BMW--are awarded to lottery participants living in that postal code. On average, this generates a temporary, unexpected income shock equal to about eight months of income for about one third of the households in a typical winning code, while leaving the incomes of nonwinning, neighboring households unaffected. We study the responses of consumption and reported happiness of both winners and nonwinners to these shocks. Consistent with simple models of in-kind transfers, the overwhelming majority of households who won a BMW convert it into cash. With the exception of food away from home, the only 'own' effects of cash winnings we detect are on durables expenditures and car consumption; these results support a version of the permanent income hypothesis in which durable spending is used to smooth consumption. We detect social effects of neighbors' winnings on two types of consumption: cars and exterior home renovations. Six months after the fact, winning the lottery does not make households happier, nor do neighbors' winnings reduce happiness.

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Bibliographic Info

Paper provided by Department of Economics, UC Santa Barbara in its series University of California at Santa Barbara, Economics Working Paper Series with number qt07k895v4.

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Date of creation: 01 May 2008
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Handle: RePEc:cdl:ucsbec:qt07k895v4

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Keywords: social interactions; quasi-experiments;

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Cited by:
  1. Frijters, Paul & Johnston, David W. & Shields, Michael A., 2008. "Happiness Dynamics with Quarterly Life Event Data," IZA Discussion Papers 3604, Institute for the Study of Labor (IZA).
  2. Benedicte Apouey & Andrew E. Clark, 2009. "Winning Big but Feeling no Better? The Effect of Lottery Prizes on Physical and Mental Health," Working Papers 2009.96, Fondazione Eni Enrico Mattei.
  3. Christian Ghiglino & Sanjeev Goyal, 2008. "Keeping up with the neighbours: social interaction in a market economy," Economics Discussion Papers 655, University of Essex, Department of Economics.
  4. Kuhn, Peter J. & Kooreman, Peter & Soetevent, Adriaan R. & Kapteyn, Arie, 2010. "The Effects of Lottery Prizes on Winners and their Neighbors: Evidence from the Dutch Postcode Lottery," IZA Discussion Papers 4950, Institute for the Study of Labor (IZA).
  5. Vinod Mishra & Ingrid Nielsen & Russell Smyth, 2010. "Relative Income, Temporary Life Shocks and Subjective Wellbeing in the Long-run," Development Research Unit Working Paper Series 51-10, Monash University, Department of Economics.

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