The Ticket to Easy Street? The Financial Consequences of Winning the Lottery

Abstract:     
This paper addresses whether receiving large cash prizes of up to $150,000 reduces bankruptcy. While one might hope that additional resources help individuals avert bankruptcy, there are reasons why this may not be the case. For example, if recipients have high discount rates, engage in mental accounting, become accustomed to a more expensive lifestyle, or consciously consume the winnings in the expectation that they will later file for bankruptcy anyway, then receipt of large lump sums may not reduce future bankruptcy filings. To address this question, we exploit a unique dataset of Florida lottery winners from 1993-2002 linked to bankruptcy records. Under the identifying assumption that the magnitude of the cash prize is random conditional on winning one time, we isolate the effect of large lump-sum payments from the effects of potential confounding factors by comparing the bankruptcy rates of large winners to those of small winners. Results show that although recipients of $50,000 to $150,000 are 50 percent less likely to file for bankruptcy in the two years after winning than are recipients of less than $10,000, they experience a statistically significant increase in bankruptcy rates of similar magnitude three to five years after winning. This suggests that winning the lottery only postpones bankruptcy rather than reducing it despite the fact that the median large winner received enough money to pay off all of her unsecured debts. Furthermore, among those who filed for bankruptcy in the five years after winning we find that there is no difference in either net assets or unsecured debt between large and small winners. This suggests that policymakers ought to use considerable caution in giving additional resources to heavily indebted individuals with the hope of increasing their longer-term financial well-being.

Keywords: lottery, bankruptcy, winnings

Working Paper Series