Lottery Winners Cause Neighbors To Go Bankrupt
People whose neighbors win the lottery are more likely to take financial risks. This in turn leads to bankruptcy, a new study has shown.
Neighbors of lottery winners have a higher probability of bankruptcy owing to increased conspicuous consumption, financial risk-taking, and borrowing. This is according to researchers at the University of Alberta in Canada and Georgetown University in the US.
“Using lottery winnings as plausibly exogenous variations in the relative income of peers, we find that the dollar magnitude of a lottery win of one neighbor increases subsequent borrowing and bankruptcies among other neighbors,” a paper detailing the research states.
Lottery Neighbors Trying To Keep Up
The paper references the idiom ‘keeping up with the Joneses’. For example, people attempt to match the high spending of their peers in order to not appear socially or culturally inferior.
The researchers studied data of 7,337 lottery winners and bankruptcy filers in an unnamed Canadian province between 2004 and 2014. The study focussed on winnings lower than C$150,00, as larger winners tended to move away to more prosperous neighborhoods.
Their findings concluded that the larger the lottery winnings of one individual in a small neighborhood, the more subsequent bankruptcies there would be amongst individuals in that neighborhood.
This was due to the neighbors of lottery winners increasing their spending on items visible to their wealthy neighbors. This includes items like cars and housing renovations. An earlier version of the study found that spending did not increase on non-visible items, like furniture.
“We also found that borrowing in the entire neighborhood increases with amounts,” the paper adds. “These findings are consistent with additional risk-taking and debt accumulation to finance conspicuous consumption. This leads to financial difficulties and bankruptcy for nonwinning peers.”
The researchers suggest the study could prompt further research into whether wealth inequality in the broader economy could lead to the kind of financial distress that precipitates financial crises, such as those that occurred in 1929 and 2008.
