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Do Consumers Gamble to Convexify?

  • 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)

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.

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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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Paper provided by Koc University-TUSIAD Economic Research Forum in its series Koç University-TUSIAD Economic Research Forum Working Papers with number 1314.

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Length: 46 pages
Date of creation: Jun 2013
Date of revision:
Handle: RePEc:koc:wpaper:1314
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  1. Joulfaian, D. & Wilheim, M.O., 1992. "Inheritance and Labor Supply," Papers 6-92-2, Pennsylvania State - Department of Economics.
  2. Roger Hartley & Lisa Farrell, 2002. "Can Expected Utility Theory Explain Gambling?," American Economic Review, American Economic Association, vol. 92(3), pages 613-624, June.
  3. Timothy Besley & Stephen Coate & Glenn Loury, 1992. "The Economics of Rotating Savings and Credit Associations," Boston University - Institute for Economic Development 24, Boston University, Institute for Economic Development.
  4. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
  5. Raj Chetty & Adam Szeidl, 2006. "Consumption Commitments and Risk Preferences," NBER Working Papers 12467, National Bureau of Economic Research, Inc.
  6. Katherine L. Milkman & John L. Beshears, 2007. "Mental Accounting and Small Windfalls: Evidence from an Online Grocer," Harvard Business School Working Papers 08-024, Harvard Business School, revised Sep 2008.
  7. 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.
  8. 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.
  9. Rogerson, Richard, 1988. "Indivisible labor, lotteries and equilibrium," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 3-16, January.
  10. 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.
  11. 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.
  12. Robert M. Townsend & Kenichi Ueda, 2003. "Financial Deepening, Inequality, and Growth; A Model-Based Quantitative Evaluation," IMF Working Papers 03/193, International Monetary Fund.
  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.
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