Does the Relative Income of Peers Cause Financial Distress? Evidence from Lottery Winners and Neighboring Bankruptcies

83 Pages Posted: 8 Jun 2018  

Sumit Agarwal

National University of Singapore

Vyacheslav Mikhed

Federal Reserve Bank of Philadelphia

Barry Scholnick

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

Date Written: 2018-05-24

Abstract

We examine whether relative income differences among peers can generate financial distress. Using lottery winnings as plausibly exogenous variations in the relative income of peers, we find that the dollar magnitude of a lottery win of one neighbor increases subsequent borrowing and bankruptcies among other neighbors. We also examine which factors may mitigate lenders’ bankruptcy risk in these neighborhoods. We show that bankruptcy filers can obtain secured but not unsecured debt, and lenders provide secured credit to low-risk but not high-risk debtors. In addition, we find evidence consistent with local lenders reducing bankruptcy risk using soft information.

Keywords: financial distress, social comparisons among peers

JEL Classification: D14, D31, G02, K35

Suggested Citation

Agarwal, Sumit and Mikhed, Vyacheslav and Scholnick, Barry, Does the Relative Income of Peers Cause Financial Distress? Evidence from Lottery Winners and Neighboring Bankruptcies (2018-05-24). FRB of Philadelphia Working Paper No. 18-16. Available at SSRN: https://ssrn.com/abstract=3192154 or http://dx.doi.org/10.21799/frbp.wp.2018.16

Sumit Agarwal (Contact Author)

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (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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