The Own and Social Effects of an Unexpected Income Shock: Evidence from the Dutch Postcode Lottery
University of California, Santa Barbara - Department of Economics; Institute for the Study of Labor (IZA); National Bureau of Economic Research (NBER)
Tilburg University - Center and Faculty of Economics and Business Administration; Institute for the Study of Labor (IZA)
Adriaan R. Soetevent
University of Amsterdam - Amsterdam School of Economics; Tinbergen Institute
RAND Corporation; Institute for the Study of Labor (IZA)
NBER Working Paper No. w14035
In the Dutch Postcode Lottery a postal code (19 households on average) is randomly selected weekly, and prizes - consisting of cash and a new BMW - are awarded to lottery participants living in that postal code. On average, this generates a temporary, unexpected income shock equal to about eight months of income for about one third of the households in a typical winning code, while leaving the incomes of nonwinning, neighboring households unaffected. We study the responses of consumption and reported happiness of both winners and nonwinners to these shocks. Consistent with simple models of in-kind transfers, the overwhelming majority of households who won a BMW convert it into cash. With the exception of food away from home, the only 'own' effects of cash winnings we detect are on durables expenditures and car consumption; these results support a version of the permanent income hypothesis in which durable spending is used to smooth consumption. We detect social effects of neighbors' winnings on two types of consumption: cars and exterior home renovations. Six months after the fact, winning the lottery does not make households happier, nor do neighbors' winnings reduce happiness.
Number of Pages in PDF File: 58working papers series
Date posted: June 2, 2008
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