Does Inequality Cause Financial Distress? Evidence from Lottery Winners and Neighboring Bankruptcies

49 Pages Posted: 12 Feb 2016  

Sumit Agarwal

Georgetown University - Department of Finance

Vyacheslav Mikhed

Federal Reserve Bank of Philadelphia

Barry Scholnick

University of Alberta - Department of Marketing, Business Economics & Law

Date Written: 2016-02-11

Abstract

Revised Oct 2016. We test the hypothesis that income inequality causes financial distress. To identify the effect of income inequality, we examine lottery prizes of random dollar magnitudes in the context of very small neighborhoods (13 households on average). We find that a C$1,000 increase in the lottery prize causes a 2.4% rise in subsequent bankruptcies among the winners’ close neighbors. We also provide evidence of conspicuous consumption as a mechanism for this causal relationship. The size of lottery prizes increases the value of visible assets (houses, cars, motorcycles), but not invisible assets (cash and pensions), appearing on the balance sheets of neighboring bankruptcy filers.

Keywords: Income inequality, Bankruptcy, Conspicuous consumption, Lottery, Financial distress

JEL Classification: C14, D31, K35

Suggested Citation

Agarwal, Sumit and Mikhed, Vyacheslav and Scholnick, Barry, Does Inequality Cause Financial Distress? Evidence from Lottery Winners and Neighboring Bankruptcies (2016-02-11). FRB of Philadelphia Working Paper No. 16-4. Available at SSRN: https://ssrn.com/abstract=2731562

Sumit Agarwal (Contact Author)

Georgetown University - Department of Finance ( email )

3700 O Street, NW
Washington, DC 20057
United States
202-687-8207 (Phone)

HOME PAGE: http://www.ushakrisna.com

Vyacheslav Mikhed

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Barry Scholnick

University of Alberta - Department of Marketing, Business Economics & Law ( email )

Edmonton, Alberta T6G 2R6
Canada

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