IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

Do consumers gamble to convexify?

  • 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 (Tanner)


    (Institute for Fiscal Studies and University of Bristol)

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.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by Institute for Fiscal Studies in its series IFS Working Papers with number W11/07.

in new window

Date of creation: May 2011
Date of revision:
Handle: RePEc:ifs:ifsewp:11/07
Contact details of provider: Postal: The Institute for Fiscal Studies 7 Ridgmount Street LONDON WC1E 7AE
Phone: (+44) 020 7291 4800
Fax: (+44) 020 7323 4780
Web page:

More information through EDIRC

Order Information: Postal: The Institute for Fiscal Studies 7 Ridgmount Street LONDON WC1E 7AE

References listed on IDEAS
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.:

as in new window
  1. Besley, T. & Coate, S. & Loury, G., 1992. "The economics of Rotating Savings and Credit Associations," Papers 157, Princeton, Woodrow Wilson School - Development Studies.
  2. 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 372-79, June.
  3. Rogerson, Richard, 1988. "Indivisible labor, lotteries and equilibrium," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 3-16, January.
  4. Joulfaian, D. & Wilheim, M.O., 1992. "Inheritance and Labor Supply," Papers 6-92-2, Pennsylvania State - Department of Economics.
  5. Roger Hartley & Lisa Farrell, 2002. "Can Expected Utility Theory Explain Gambling?," American Economic Review, American Economic Association, vol. 92(3), pages 613-624, June.
  6. repec:tpr:qjecon:v:122:y:2007:i:2:p:831-877 is not listed on IDEAS
  7. Raj Chetty & Adam Szeidl, 2006. "Consumption Commitments and Risk Preferences," NBER Working Papers 12467, National Bureau of Economic Research, Inc.
  8. 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.
  9. 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.
  10. Robert M. Townsend & Kenichi Ueda, 2003. "Financial Deepening, Inequality, and Growth: A Model-Based Quantitative Evaluation," IMF Working Papers 03/193, International Monetary Fund.
  11. Peter Tufano, 2008. "Saving whilst Gambling: An Empirical Analysis of UK Premium Bonds," American Economic Review, American Economic Association, vol. 98(2), pages 321-26, May.
  12. 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 209-15, June.
  13. 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.
  14. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:ifs:ifsewp:11/07. 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: (Benita Rajania)

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 references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link 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 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.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.