How one man’s jackpot could catalyze his neighbour’s bankruptcy
Generally speaking, it’s not such a big deal when the grass is greener on the other side of the fence. But when that grass is followed by a new car, a freshly painted house, and other drastic improvements, it could make neighbours green with envy — and cause them to make unwise financial choices.
That’s the main takeaway from a working paper from the Federal Reserve Bank of Philadelphia, reported Bloomberg. Titled Does the Relative Income of Peers Cause Financial Distress? Evidence from Lottery Winners and Neighboring Bankruptcies, the study looked at data from an unnamed Canadian province on 7,337 lottery prizes, which ranged from $1,000 to $150,000 and were given from 2004 to 2014.
By focusing on small lottery prizes, the researchers were able to limit the study to winners that didn’t move out of their neighbourhoods. In addition, the authors thought that people who knew their neighbour had gotten lucky in the lottery would be less inclined to increase their spending; by focusing on small lottery winners, who were more likely to keep their good luck a secret, the researchers were more likely to capture the full effect of trying to keep up with the Joneses.
“The larger the dollar magnitude of a lottery prize of one individual in a very small neighbourhood, the more subsequent bankruptcies there will be from other individuals in that neighbourhood,” the paper said. The authors also found that a prize amounting to $29,000, the median household income, tended to raise the bankruptcy rate by 6.6%.
An earlier version of the paper published in 2016 got significant publicity, particularly for its finding that neighbours of lottery winners raised spending on items that could be viewed from outside the house such as cars, but not on indoor goods like furniture.
In an email to Bloomberg, co-author Vyacheslav Mikhed of the Philadelphia Fed said that the new version builds on the original with important insights. For example, the neighbours that filed for bankruptcy tended to have more of their assets in high-risk investments like stocks rather than insurance and cash. In addition, neighbours of lottery winners tended to borrow more than Canadians who weren’t in the same neighbourhood as a lottery winner.
“One heartening sign: There was no evidence that the people who filed for bankruptcy were especially likely to list gambling as a cause of their financial distress,” Bloomberg reported. “That indicates that they weren’t superstitiously buying more lottery tickets in hopes that the neighbor’s good luck would rub off on them.”