The ''Jackpot'' Question: How Do Cash Windfalls Affect Entrepreneurial Activities?

Abstract

How do cash windfalls affect the entrepreneurial activities of typical entrepreneurs in small firms? We use a novel setting that exploits the bonuses retailers earn when selling jackpot-winning lottery tickets. An additional $100,000 increases revenues by $36,561 and employment by 0.87. Large windfalls spur new business creation in non-retail industries, which is associated with the closedown of existing businesses. Consistent with wealth-effects and financial-constraints, the effects are stronger for owners without real properties or in low-income areas. Allowing non-linearities in the effects of cash windfalls, we further separate these two channels and document a pecking order in entrepreneurs' growing decisions.

Keywords: cash windfall, cash transfers, small businesses, entrepreneurship, Mega Millions, Powerball, lottery

JEL Classification: G32, L26, M13