Peersâ€™ Income and Financial Distress: Evidence from Lottery Winners and Neighboring Bankruptcies
105 Pages Posted: 31 Oct 2018 Last revised: 21 Feb 2019
Date Written: 2018-10-24
SUPRSEDES WP 18-16 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 lendersâ€™ bankruptcy risk in these neighborhoods. We show that bankruptcy filers obtain more secured but not unsecured debt, and lenders provide additional credit to low-risk but not high-risk debtors. In addition, we find evidence consistent with local lenders taking advantage of soft information to mitigate credit risk.
Keywords: financial distress, social comparisons among peers
JEL Classification: D14, D31, G02, K35
Suggested Citation: Suggested Citation