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Estimating the Effect of Unearned Income on Labor Supply, Earnings, Savings, and Consumption: Evidence from a Survey of Lottery Players

60 Pages Posted: 7 Jul 1999 Last revised: 12 Oct 2010

Guido W. Imbens

Stanford Graduate School of Business

Donald B. Rubin

Harvard University - Department of Statistics

Bruce Sacerdote

Dartmouth College - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: March 1999

Abstract

Knowledge of the effect of unearned income on economic behavior of individuals in general, and on labor supply in particular, is of great importance to policy makers. Estimation of income effects, however, is a difficult problem because income is not randomly assigned and exogenous changes in income are difficult to identify. Here we exploit the randomized assignment of large amounts of money over long periods of time through lotteries. We carried out a survey of people who played the lottery in the mid-eighties and estimate the effect of lottery winnings on their subsequent earnings, labor supply, consumption, and savings. We find that winning a modest prize ($15,000 per year for twenty years) does not affect labor supply or earnings substantially. Winning such a prize does not considerably reduce savings. Winning a much larger prize ($80,000 rather than $15,000 per year) reduces labor supply as measured by hours, as well as participation and social security earnings; elasticities for hours and earnings are around -0.20 and for participation around -0.14. Winning a large versus modest amount also leads to increased expenditures on cars and larger home values, although mortgages values appear to increase by approximately the same amount. Winning $80,000 increases overall savings, although savings in retirement accounts are not significantly affected. The results do not vary much by gender, age, or prior employment status. There is some evidence that for those with zero earnings prior to winning the lottery there is a positive effect of winning a small prize on subsequent labor market participation.

Suggested Citation

Imbens, Guido W. and Rubin, Donald B. and Sacerdote, Bruce, Estimating the Effect of Unearned Income on Labor Supply, Earnings, Savings, and Consumption: Evidence from a Survey of Lottery Players (March 1999). NBER Working Paper No. w7001. Available at SSRN: https://ssrn.com/abstract=154713

Guido W. Imbens (Contact Author)

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Donald B. Rubin

Harvard University - Department of Statistics ( email )

Science Center 7th floor
One Oxford Street
Cambridge, MA 02138-2901
United States

Bruce Sacerdote

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Dartmouth College - Department of Economics ( email )

6106 Rockefeller Hall
Hanover, NH 03755
United States
603-646-2121 (Phone)
603-646-2122 (Fax)

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