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Does the Relative Income of Peers Cause Financial Distress? Evidence from Lottery Winners and Neighboring Bankruptcies

Author

Listed:
  • Agarwal, Sumit

    (Georgetown university)

  • Mikhed, Vyacheslav

    (Federal Reserve Bank of Philadelphia)

  • Scholnick, Barry

    (University of Alberta)

Abstract

We examine whether relative income differences among peers can generate financial distress. Using lottery winnings as plausibly exogenous variations in the relative income of peers, we find that the dollar magnitude of a lottery win of one neighbor increases subsequent borrowing and bankruptcies among other neighbors. We also examine which factors may mitigate lenders’ bankruptcy risk in these neighborhoods. We show that bankruptcy filers can obtain secured but not unsecured debt, and lenders provide secured credit to low-risk but not high-risk debtors. In addition, we find evidence consistent with local lenders reducing bankruptcy risk using soft information.

Suggested Citation

  • Agarwal, Sumit & Mikhed, Vyacheslav & Scholnick, Barry, 2018. "Does the Relative Income of Peers Cause Financial Distress? Evidence from Lottery Winners and Neighboring Bankruptcies," Working Papers 18-16, Federal Reserve Bank of Philadelphia.
  • Handle: RePEc:fip:fedpwp:18-16
    DOI: 10.21799/frbp.wp.2018.16
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    More about this item

    Keywords

    financial distress; social comparisons among peers;

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • K35 - Law and Economics - - Other Substantive Areas of Law - - - Personal Bankruptcy Law

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