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Do consumers gamble to convexify?

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  • Thomas Crossley

    () (Institute for Fiscal Studies and Institute for Fiscal Studies, University of Essex)

  • Hamish Low

    () (Institute for Fiscal Studies and Trinity College, Cambridge)

  • Sarah Smith

    () (Institute for Fiscal Studies and University of Bristol)

Abstract

When consumption goods are indivisible, individuals have to hold enough resources to cross a purchasing threshold. If individuals are liquidity constrained, they are unable to borrow to cross that threshold. Instead, we show that such individuals, even if risk averse, may choose to play gamble through playing lotteries to have a chance of crossing the threshold. One implication of this model is that income effects for individuals who choose to play lotteries are likely to be larger than for the general population. This in turn implies that estimating income effects through the random allocation of lottery winnings is likely to be a biased estimate of income effects of the broader population who chose not to gamble. Using UK data on lottery wins, other windfalls and durable good purchases, we show that lottery players display higher income effects than non-players but only amongst those likely to be credit constrained. This is consistent with credit constrained, risk-averse agents gambling in order to cross a purchase threshold and to convexify their budget set.

Suggested Citation

  • Thomas Crossley & Hamish Low & Sarah Smith, 2011. "Do consumers gamble to convexify?," IFS Working Papers W11/07, Institute for Fiscal Studies.
  • Handle: RePEc:ifs:ifsewp:11/07
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    References listed on IDEAS

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    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.

    More about this item

    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

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