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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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    2. Abbi M Kedir & Richard Disney & Indraneel Dasgupta, 2011. "Why use ROSCAs when you can use banks? Theory, and evidence from Ethiopia," Discussion Papers in Economics 11/32, Division of Economics, School of Business, University of Leicester, revised Jun 2011.
    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. Francois R. Velde, 2018. "Lottery Loans in the Eighteenth Century," Working Paper Series WP-2018-7, Federal Reserve Bank of Chicago.
    6. Hamish Low & Costas Meghir, 2017. "The Use of Structural Models in Econometrics," Journal of Economic Perspectives, American Economic Association, vol. 31(2), pages 33-58, Spring.
    7. Roth, Paula, 2020. "Inequality, Relative Deprivation and Financial Distress: Evidence from Swedish Register Data," Working Paper Series 1374, Research Institute of Industrial Economics.
    8. Sylvan Herskowitz, 2021. "Gambling, Saving, and Lumpy Liquidity Needs," American Economic Journal: Applied Economics, American Economic Association, vol. 13(1), pages 72-104, January.

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    More about this item

    Keywords

    Gambling; Lotteries; Consumption; Durables.;
    All these keywords.

    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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