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Do Consumers Gamble to Convexify?

Author

Listed:
  • Thomas F. Crossley

    (Koç University, University of Cambridge, and Institute for Fiscal Studies, London)

  • Hamish Low

    () (University of Cambridge, and Institute for Fiscal Studies, London)

  • Sarah Smith

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

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. One implication of this is that 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-onstrained. This is consistent with credit-constrained, risk-averse agents gambling to convexify their budget set.

Suggested Citation

  • Thomas F. Crossley & Hamish Low & Sarah Smith, 2013. "Do Consumers Gamble to Convexify?," Koç University-TUSIAD Economic Research Forum Working Papers 1314, Koc University-TUSIAD Economic Research Forum.
  • Handle: RePEc:koc:wpaper:1314
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    File URL: http://eaf.ku.edu.tr/sites/eaf.ku.edu.tr/files/erf_wp_1314.pdf
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    References listed on IDEAS

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    Citations

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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.
    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

    Gambling; Lotteries; Consumption; Durables.;

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • 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

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