IDEAS home Printed from https://ideas.repec.org/a/eee/jeborg/v131y2016ipap276-291.html
   My bibliography  Save this article

Do consumers gamble to convexify?

Author

Listed:
  • Crossley, Thomas F.
  • Low, Hamish
  • Smith, Sarah

Abstract

The combination of credit constraints and indivisible consumption goods may induce some risk-averse individuals to gamble to have a chance of crossing a purchasing threshold. This idea has been demonstrated theoretically, but not explored empirically. We test this idea by focusing on a key implication: income effects for individuals who choose to gamble are likely to be larger than for the general population. Using UK data on gambling wins, other windfalls and durable goods purchases, we show that winners display higher income effects than non-winners but only amongst those likely to be credit-constrained. This is consistent with credit-constrained, risk-averse agents gambling to convexify their budget set.

Suggested Citation

  • Crossley, Thomas F. & Low, Hamish & Smith, Sarah, 2016. "Do consumers gamble to convexify?," Journal of Economic Behavior & Organization, Elsevier, vol. 131(PA), pages 276-291.
  • Handle: RePEc:eee:jeborg:v:131:y:2016:i:pa:p:276-291
    DOI: 10.1016/j.jebo.2016.07.023
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0167268116301585
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Benedicte Apouey & Andrew E. Clark, 2015. "Winning Big but Feeling no Better? The Effect of Lottery Prizes on Physical and Mental Health," Health Economics, John Wiley & Sons, Ltd., vol. 24(5), pages 516-538, May.
    2. Milkman, Katherine L. & Beshears, John, 2009. "Mental accounting and small windfalls: Evidence from an online grocer," Journal of Economic Behavior & Organization, Elsevier, vol. 71(2), pages 384-394, August.
    3. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
    4. Erik Snowberg & Justin Wolfers, 2010. "Explaining the Favorite-Long Shot Bias: Is it Risk-Love or Misperceptions?," Journal of Political Economy, University of Chicago Press, vol. 118(4), pages 723-746, August.
    5. Melissa Schettini Kearney & Peter Tufano & Jonathan Guryan & Erik Hurst, 2010. "Making Savers Winners: An Overview of Prize-Linked Savings Products," NBER Working Papers 16433, National Bureau of Economic Research, Inc.
    6. Besley, Timothy & Coate, Stephen & Loury, Glenn, 1993. "The Economics of Rotating Savings and Credit Associations," American Economic Review, American Economic Association, vol. 83(4), pages 792-810, September.
    7. Rasmus Lentz & Torben Tranas, 2005. "Job Search and Savings: Wealth Effects and Duration Dependence," Journal of Labor Economics, University of Chicago Press, vol. 23(3), pages 467-490, July.
    8. Peter Kuhn & Peter Kooreman & Adriaan Soetevent & Arie Kapteyn, 2011. "The Effects of Lottery Prizes on Winners and Their Neighbors: Evidence from the Dutch Postcode Lottery," American Economic Review, American Economic Association, vol. 101(5), pages 2226-2247, August.
    9. Robert M. Townsend & Kenichi Ueda, 2006. "Financial Deepening, Inequality, and Growth: A Model-Based Quantitative Evaluation -super-1," Review of Economic Studies, Oxford University Press, vol. 73(1), pages 251-293.
    10. Roger Hartley & Lisa Farrell, 2002. "Can Expected Utility Theory Explain Gambling?," American Economic Review, American Economic Association, vol. 92(3), pages 613-624, June.
    11. Raj Chetty & Adam Szeidl, 2007. "Consumption Commitments and Risk Preferences," The Quarterly Journal of Economics, Oxford University Press, vol. 122(2), pages 831-877.
    12. James J. Heckman & Jeffrey A. Smith, 1995. "Assessing the Case for Social Experiments," Journal of Economic Perspectives, American Economic Association, vol. 9(2), pages 85-110, Spring.
    13. David Joulfaian & Mark O. Wilhelm, 1994. "Inheritance and Labor Supply," Journal of Human Resources, University of Wisconsin Press, vol. 29(4), pages 1205-1234.
    14. Erik Hurst & Annamaria Lusardi, 2004. "Liquidity Constraints, Household Wealth, and Entrepreneurship," Journal of Political Economy, University of Chicago Press, vol. 112(2), pages 319-347, April.
    15. Rogerson, Richard, 1988. "Indivisible labor, lotteries and equilibrium," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 3-16, January.
    16. Epley, Nicholas & Gneezy, Ayelet, 2007. "The framing of financial windfalls and implications for public policy," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 36(1), pages 36-47, February.
    17. Handa, Sudhanshu & Kirton, Claremont, 1999. "The economics of rotating savings and credit associations: evidence from the Jamaican 'Partner'," Journal of Development Economics, Elsevier, vol. 60(1), pages 173-194, October.
    18. Greg Kaplan & Giovanni L. Violante & Justin Weidner, 2014. "The Wealthy Hand-to-Mouth," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 48(1 (Spring), pages 77-153.
    19. Gardner, Jonathan & Oswald, Andrew J., 2007. "Money and mental wellbeing: A longitudinal study of medium-sized lottery wins," Journal of Health Economics, Elsevier, vol. 26(1), pages 49-60, January.
    20. Guido W. Imbens & Donald B. Rubin & Bruce I. Sacerdote, 2001. "Estimating the Effect of Unearned Income on Labor Earnings, Savings, and Consumption: Evidence from a Survey of Lottery Players," American Economic Review, American Economic Association, vol. 91(4), pages 778-794, September.
    21. Peter Tufano, 2008. "Saving whilst Gambling: An Empirical Analysis of UK Premium Bonds," American Economic Review, American Economic Association, vol. 98(2), pages 321-326, May.
    22. Ng Yew Kwang, 1965. "Why do People Buy Lottery Tickets? Choices Involving Risk and the Indivisibility of Expenditure," Journal of Political Economy, University of Chicago Press, vol. 73, pages 530-530.
    23. Kaplan, Greg & Violante, Giovanni L & Weidner, Justin, 2014. "The Wealthy Hand-to-Mouth," CEPR Discussion Papers 9954, C.E.P.R. Discussion Papers.
    24. Bailey, Martin J & Olson, Mancur & Wonnacott, Paul, 1980. "The Marginal Utility of Income Does not Increase: Borrowing, Lending, and Friedman-Savage Gambles," American Economic Review, American Economic Association, vol. 70(3), pages 372-379, June.
    25. Scott Hankins & Mark Hoekstra, 2011. "Lucky in Life, Unlucky in Love?: The Effect of Random Income Shocks on Marriage and Divorce," Journal of Human Resources, University of Wisconsin Press, vol. 46(2), pages 403-426.
    26. Gianluca Violante & Greg Kaplan & Justin Weidner, 2014. "The Wealthy Hand-to-Mouth," 2014 Meeting Papers 192, Society for Economic Dynamics.
    27. Benedicte Apouey & Andrew E. Clark, 2015. "Winning Big but Feeling no Better? The Effect of Lottery Prizes on Physical and Mental Health," Health Economics, John Wiley & Sons, Ltd., vol. 24(5), pages 516-538, 05.
    28. Keeler, James P & James, William L & Abdel-Ghany, Mohamed, 1985. "The Relative Size of Windfall Income and the Permanent Income Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 3(3), pages 209-215, June.
    29. Greg Kaplan & Giovanni L. Violante & Justin Weidner, 2014. "The Wealthy Hand-to-Mouth," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 45(1 (Spring), pages 77-153.
    30. Tullio Jappelli, 1990. "Who is Credit Constrained in the U. S. Economy?," The Quarterly Journal of Economics, Oxford University Press, vol. 105(1), pages 219-234.
    31. Greg Kaplan & Giovanni L. Violante & Justin Weidner, 2014. "The Wealthy Hand-to-Mouth," NBER Working Papers 20073, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Andreas Fagereng & Martin B. Holm & Gisle J. Natvik, 2016. "MPC heterogeneity and household balance sheets," Discussion Papers 852, Statistics Norway, Research Department.
    2. Abbi Kedir & Richard Disney & Indraneel Dasgupta, "undated". "Why Use Roscas When You Can Use Banks? Theory And Evidence From Ethiopia," Discussion Papers 11/05, University of Nottingham, CREDIT.
    3. Atalay, Kadir & Bakhtiar, Fayzan & Cheung, Stephen & Slonim, Robert, 2014. "Savings and prize-linked savings accounts," Journal of Economic Behavior & Organization, Elsevier, vol. 107(PA), pages 86-106.
    4. Appelbaum, Elie & Katz, Eliakim, 1981. "Market Constraints as a Rationale for the Friedman-Savage Utility Function," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 819-825, August.
    5. Velde, Francois R., 2018. "Lottery Loans in the Eighteenth Century," Working Paper Series WP-2018-7, Federal Reserve Bank of Chicago.

    More about this item

    Keywords

    Lotteries; Income effects; Consumption; Durables; External validity;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • L83 - Industrial Organization - - Industry Studies: Services - - - Sports; Gambling; Restaurants; Recreation; Tourism
    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jeborg:v:131:y:2016:i:pa:p:276-291. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/jebo .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.