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

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Author Info
Peter Kuhn
Peter Kooreman
Adriaan R. Stoetevent
Arie Kapteyn

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Abstract

In the Dutch Postcode Lottery a postal code (19 households on average) is randomly selected weekly, and prizes Ðconsisting 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. The authors 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 they 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. They 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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Paper provided by RAND Corporation Publications Department in its series Working Papers with number 574.

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Length: 58 pages
Date of creation: May 2008
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Handle: RePEc:ran:wpaper:574

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Keywords: social interactions quasi-experiments

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Find related papers by JEL classification:
D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Martin Browning & Thomas F. Crossley, 2004. "Shocks, stocks and socks: smoothing consumption over a temporary income loss," CAM Working Papers 2004-05, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics. [Downloadable!]
  2. Lawrence F. Katz & Jeffrey R. Kling & Jeffrey B. Liebman, 2001. "Moving To Opportunity In Boston: Early Results Of A Randomized Mobility Experiment," The Quarterly Journal of Economics, MIT Press, vol. 116(2), pages 607-654, May. [Downloadable!] (restricted)
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  3. Edward Miguel & Michael Kremer, 2004. "Worms: Identifying Impacts on Education and Health in the Presence of Treatment Externalities," Econometrica, Econometric Society, vol. 72(1), pages 159-217, 01. [Downloadable!] (restricted)
  4. Jeffrey R. Kling & Jens Ludwig & Lawrence F. Katz, 2005. "Neighborhood Effects on Crime for Female and Male Youth: Evidence from a Randomized Housing Voucher Experiment," The Quarterly Journal of Economics, MIT Press, vol. 120(1), pages 87-130, January.
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  5. Bagwell, Laurie Simon & Bernheim, B Douglas, 1996. "Veblen Effects in a Theory of Conspicuous Consumption," American Economic Review, American Economic Association, vol. 86(3), pages 349-73, June. [Downloadable!] (restricted)
  6. Moffitt, Robert A., 1984. "The effects of grants-in-aid on state and local expenditures : The case of AFDC," Journal of Public Economics, Elsevier, vol. 23(3), pages 279-305, April. [Downloadable!] (restricted)
  7. Daniel Kahneman & Alan B. Krueger & David Schkade & Norbert Schwarz & Arthur A. Stone, 2006. "Would You Be Happier If You Were Richer? A Focusing Illusion," Working Papers 77, Princeton University, Department of Economics, Center for Economic Policy Studies.. [Downloadable!]
  8. Esther Duflo & Emmanuel Saez, 2003. "The Role Of Information And Social Interactions In Retirement Plan Decisions: Evidence From A Randomized Experiment," The Quarterly Journal of Economics, MIT Press, vol. 118(3), pages 815-842, August. [Downloadable!] (restricted)
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  9. Manski, Charles F, 1993. "Identification of Endogenous Social Effects: The Reflection Problem," Review of Economic Studies, Blackwell Publishing, vol. 60(3), pages 531-42, July. [Downloadable!] (restricted)
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  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). [Downloadable!]
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