Financial Regulation and Household Portfolio Reallocation: The Impact of the 1905 Dutch Lottery Ban

Abstract

Do individuals adjust their investment portfolio when the government restricts gambling? We use hand-collected records of the Dutch inheritance tax to study portfolio reallocations following the 1905 Dutch Lottery Ban which exempted lottery bonds. We demonstrate that less (more) wealthy people significantly increased (decreased) allocations to lottery bonds after the ban. Additionally, we provide suggestive evidence that they tilted their portfolio towards (away from) lottery-like stocks (hazard stocks). Overall, this substitution effect is weaker among the poorest, those with more readily available, legal gambling alternatives, and younger citizens. We formalize these empirical mechanisms in a life-cycle model with aspirational utility.

Keywords: Lottery Bonds, Government Intervention, Household Finance, Wealth Inequality, Savings Behavior, Lottery Ban, Financial Regulation, Asset Allocation