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Does inequality cause financial distress? Evidence from lottery winners and neighboring bankruptcies

Author

Listed:
  • Sumit Agarwal
  • Vyacheslav Mikhed
  • Barry Scholnick

Abstract

Revised Oct 2016. We test the hypothesis that income inequality causes financial distress. To identify the effect of income inequality, we examine lottery prizes of random dollar magnitudes in the context of very small neighborhoods (13 households on average). We find that a C$1,000 increase in the lottery prize causes a 2.4% rise in subsequent bankruptcies among the winners? close neighbors. We also provide evidence of conspicuous consumption as a mechanism for this causal relationship. The size of lottery prizes increases the value of visible assets (houses, cars, motorcycles), but not invisible assets (cash and pensions), appearing on the balance sheets of neighboring bankruptcy filers.

Suggested Citation

  • Sumit Agarwal & Vyacheslav Mikhed & Barry Scholnick, 2016. "Does inequality cause financial distress? Evidence from lottery winners and neighboring bankruptcies," Working Papers 16-4, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:16-4
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    References listed on IDEAS

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    2. Leonardo Bursztyn & Bruno Ferman & Stefano Fiorin & Martin Kanz & Gautam Rao, 2018. "Status Goods: Experimental Evidence from Platinum Credit Cards," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 133(3), pages 1561-1595.
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    More about this item

    Keywords

    Income inequality; Bankruptcy; Conspicuous consumption; Lottery; Financial distress;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • K35 - Law and Economics - - Other Substantive Areas of Law - - - Personal Bankruptcy Law

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