Why you might go bankrupt if your next-door neighbor wins the lottery

Feb 16, 2016, 10:12 am (39 comments)

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Winning the lottery can be hazardous to your neighbors' financial health.

Research released this month by the Federal Reserve Bank of Philadelphia found a significant jump in bankruptcies among households living near someone who won a big lottery jackpot. The economists theorized that people may have seen the good fortune next door and felt pressure to accumulate more assets of their own, especially flashy purchases like cars, that they simply could not afford.

"Income inequality induces poorer neighbors to consume more visible (rather than invisible) commodities to signal their abilities to 'keep up with the Joneses' to their richer neighbors," economists Sumit Agarwal, Vyacheslav Mikhed and Barry Scholnickwrote. "This tendency can lead to additional and unsustainable borrowing among the relatively poor to finance this additional conspicuous consumption, which can eventually result in financial distress and bankruptcy."

Mr. Agarwal is a professor at the National University of Singapore, Mr. Mikhed works at the Philadelphia Fed's Payment Cards Center and Mr. Scholnick is a professor at the University of Alberta. Their research was circulated in a Philadelphia Fed working paper and relies on administrative data from an unnamed Canadian province. They analyzed lottery prizes and bankruptcy filings over 10 years, sorted down to six-digit postal codes that on average contained only 13 households, revealing financial ripple effects on a lottery winner's closest neighbors. They limited their analysis to neighborhoods with a single lottery win and excluded cases when lottery winners themselves filed for bankruptcy. They also omitted fixed-payout lottery prizes and very large jackpots.

The headline finding: For every $1,000 increase in the lottery prize, there was a 2.4% increase in bankruptcy filings by the winner's neighbors over the next few years. "These results are more pronounced for low-income neighborhoods and high income-inequality areas," they wrote.

Why would someone winning the jackpot cause someone living down the street to go bankrupt a year or two later? The economists argued that people who feel they are poorer than their peers may spend more in a conspicuous fashion, financing their purchases with debt. But that debt will need to be repaid, potentially leading to financial difficulties and even bankruptcy.

Messrs. Agarwal, Mikhed and Scholnick analyzed the Canadian bankruptcy data and found "evidence that those who filed for bankruptcy after a larger lottery win of a close neighbor have significantly larger holdings of visible assets (e.g., cars, motorcycles, houses) relative to the holdings of these same visible assets by those who filed for bankruptcy after smaller lottery wins of a close neighbor," they wrote. There was no similar difference for "invisible assets" like cash or pensions, they said.

In other words, when someone wins a big lottery prize, neighbors appear more likely to buy cars and remodel their houses to show that they can keep up — and go broke in the process.

By demonstrating what the economists described as "causal evidence on the link between income inequality and financial distress," their paper adds to the growing use of data on lottery winners to examine the economic and social effects of sudden income windfalls.

WSJ

Comments

TheMeatman2005's avatarTheMeatman2005

Don't most lottery winners move to a more affluent neighborhood after winning?

I don't think I would be living in my current residence after I win a significant prize amount.

gocart1's avatargocart1

Quote: Originally posted by TheMeatman2005 on Feb 16, 2016

Don't most lottery winners move to a more affluent neighborhood after winning?

I don't think I would be living in my current residence after I win a significant prize amount.

I Agree! YES ....I WOULD MOVE IN A HEARTBEAT ..ALL THE PEOPLE LOOKING FOR A HANDOUT  , WOULD MAKE ME GO UNDERGROUND SOMEWHERE.PartyUS FlagParty

HoLeeKau's avatarHoLeeKau

That's what I was wondering too.  Did they analyze the neighborhood the winner was in when they won, even if they moved?  Or just the neighborhood they moved to?

tnlottodreamer's avatartnlottodreamer

Why do people think they have keep up with their neighbors for? I don't keep up with no one. I buy and do what I want and can careless what the neighbors buy or do.

music*'s avatarmusic*

 I purchased a new $14,000.00 car in 2006 and a neighbor bought the same make and model. I did not feel good about that. This happened in a low-income apartment complex.

 I would move before making any big purchases after I win big.

Hiding Behind Computer

RJOh's avatarRJOh

Sometimes lottery winners go bankrupt too acting as rich as others think they are or should be.

VenomV12

Quote: Originally posted by TheMeatman2005 on Feb 16, 2016

Don't most lottery winners move to a more affluent neighborhood after winning?

I don't think I would be living in my current residence after I win a significant prize amount.

Depending on the part of the country and the amount you win you could move to the most affluent neighborhood in the area and still be vastly wealthier than anyone else. I know a billionaire that lives in a $1.6 million house and the most expensive home in the area is maybe $2 million, maybe a little more so he's right up there without barely having to spend any of his money. He could build a $10 million castle out there easily but then he would never ever be able to sell it. So if you won $50 million and bought a $2 million house in a neighborhood with a bunch of guys making $500,000 or so, you could easily drive some of them towards bankruptcy having them try to compete with what you can buy, especially when their wives get involved. 

luckyshoes's avatarluckyshoes

Don't try to keep up with the Jones.....Crazy

Success isn't in Having money...it's in Handling it

Spiritualist

And why should I listen to research by the Fed anyway? It's a corrupt organization that has actively worked to devalue the purchasing power of my currency.

tnlottodreamer's avatartnlottodreamer

A few years ago a friend and I pretended we won $50.000 on a two dollar JUMBO buck scratch off. We changed the 13 to a 18. We went up to the lottery district office and we did a selfie of us holding the ticket. We then posted the video on Facebook and we were yelling and screaming woohoo we won. Well I had 2 people call me and at least 5 or 6 people send me a message begging me for money. I told them it was just a joke well im sure that embrassed the heck out of them. It was really funny and I still have the video of it...it's priceless.

HoLeeKau's avatarHoLeeKau

Quote: Originally posted by tnlottodreamer on Feb 16, 2016

A few years ago a friend and I pretended we won $50.000 on a two dollar JUMBO buck scratch off. We changed the 13 to a 18. We went up to the lottery district office and we did a selfie of us holding the ticket. We then posted the video on Facebook and we were yelling and screaming woohoo we won. Well I had 2 people call me and at least 5 or 6 people send me a message begging me for money. I told them it was just a joke well im sure that embrassed the heck out of them. It was really funny and I still have the video of it...it's priceless.

That's hilarious!  Imagine the phone ringing off the wall if you had won $50 million!

VenomV12

Quote: Originally posted by tnlottodreamer on Feb 16, 2016

A few years ago a friend and I pretended we won $50.000 on a two dollar JUMBO buck scratch off. We changed the 13 to a 18. We went up to the lottery district office and we did a selfie of us holding the ticket. We then posted the video on Facebook and we were yelling and screaming woohoo we won. Well I had 2 people call me and at least 5 or 6 people send me a message begging me for money. I told them it was just a joke well im sure that embrassed the heck out of them. It was really funny and I still have the video of it...it's priceless.

Ha Ha, that's great. LOL Thumbs Up

Groppo's avatarGroppo

Quote: Originally posted by TheMeatman2005 on Feb 16, 2016

Don't most lottery winners move to a more affluent neighborhood after winning?

I don't think I would be living in my current residence after I win a significant prize amount.

Yeah, no way would I stay.

I would certainly move, as my n/hood is not what it was 40 years ago.
And, if winning the lotto did happen to me, I wouldn't want people to play
"Keeping up with the Jones's", and cause them "undue" financial stress. 

Groppo's avatarGroppo

Quote: Originally posted by Spiritualist on Feb 16, 2016

And why should I listen to research by the Fed anyway? It's a corrupt organization that has actively worked to devalue the purchasing power of my currency.

Bingo.

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