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

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

Abstract

Knowledge of the effect of unearned income on economic behavior of individuals in general, and on labor supply in particular, is of great importance to policy makers. Estimation of income effects, however, is a difficult problem because income is not randomly assigned and exogenous changes in income are difficult to identify. Here we exploit the randomized assignment of large amounts of money over long periods of time through lotteries. We carried out a survey of people who played the lottery in the mid-eighties and estimate the effect of lottery winnings on their subsequent earnings, labor supply, consumption, and savings. We find that winning a modest prize ($15,000 per year for twenty years) does not affect labor supply or earnings substantially. Winning such a prize does not considerably reduce savings. Winning a much larger prize ($80,000 rather than $15,000 per year) reduces labor supply as measured by hours, as well as participation and social security earnings; elasticities for hours and earnings are around -0.20 and for participation around -0.14. Winning a large versus modest amount also leads to increased expenditures on cars and larger home values, although mortgages values appear to increase by approximately the same amount. Winning $80,000 increases overall savings, although savings in retirement accounts are not significantly affected. The results do not vary much by gender, age, or prior employment status. There is some evidence that for those with zero earnings prior to winning the lottery there is a positive effect of winning a small prize on subsequent labor market participation.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7001.

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Date of creation: Mar 1999
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Publication status: published as Imbens, Guido W., Donald B. Rubin and Bruce I. Sacerdote. "Estimating The Effect Of Unearned Income On Labor Earnings, Savings, And Consumption: Evidence From A Survey Of Lottery Players," American Economic Review, 2001, v91(4,Sep), 778-794.
Handle: RePEc:nbr:nberwo:7001

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  1. Killingsworth, Mark R. & Heckman, James J., 1987. "Female labor supply: A survey," Handbook of Labor Economics, Elsevier, in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 1, chapter 2, pages 103-204 Elsevier.
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  8. Behrman, Jere R & Pollak, Robert A & Taubman, Paul, 1982. "Parental Preferences and Provision for Progeny," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 90(1), pages 52-73, February.
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  11. Heckman, James J & Ichimura, Hidehiko & Todd, Petra, 1998. "Matching as an Econometric Evaluation Estimator," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 65(2), pages 261-94, April.
  12. Frank Stafford, 1985. "Income-Maintenance Policy and Work Effort: Learning from Experiments and Labor-Market Studies," NBER Chapters, in: Social Experimentation, pages 95-144 National Bureau of Economic Research, Inc.
  13. Heckman, James J & Ichimura, Hidehiko & Todd, Petra E, 1997. "Matching as an Econometric Evaluation Estimator: Evidence from Evaluating a Job Training Programme," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 64(4), pages 605-54, October.
  14. V. Joseph Hotz & Guido W. Imbens & Julie H. Mortimer, 1999. "Predicting the Efficacy of Future Training Programs Using Past Experiences," NBER Technical Working Papers 0238, National Bureau of Economic Research, Inc.
  15. Rajeev H. Dehejia & Sadek Wahba, 1998. "Causal Effects in Non-Experimental Studies: Re-Evaluating the Evaluation of Training Programs," NBER Working Papers 6586, National Bureau of Economic Research, Inc.
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