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Do Consumers Gamble to Convexify?

Listed author(s):
  • 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
Handle: RePEc:koc:wpaper:1314
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