The 'Jackpot' Question: How Do Cash Windfalls Affect Small Business Growth?

59 Pages Posted: 16 Dec 2018 Last revised: 17 Mar 2020

See all articles by Jacelly Cespedes

Jacelly Cespedes

University of Minnesota - Carlson School of Management

Xing Huang

Washington University in St. Louis - Olin Business School

Carlos Parra

Pontifical Catholic University of Chile - School of Business

Date Written: December 1, 2019

Abstract

Among the typical entrepreneurs in small firms, how do cash windfalls affect their entrepreneurial activities? What financial consequences exist for entrepreneurs and their businesses? We use hand-collected data in a novel setting that exploits the bonus that retailers earn when selling jackpot-winning lottery tickets. Cash windfalls have positive effects on the internal growth of the existing business. In particular, an additional $100,000 increases revenues by $36,561 and the number of employees by 0.87. Surprisingly, we find that the bonus also leads to new business creation in non-retail industries, which is associated with the closedown of existing businesses. Contrary to prior findings for non-entrepreneurs, cash windfalls do not lead to financial distress on entrepreneurs or their businesses. Both the internal growth and new business creation become stronger when owners own no real estate assets or reside in low-income ZIP codes. These findings, along with evidence of non-linear effects on entrepreneurial activity, are consistent with both financial constraints and wealth effects channels.

Keywords: cash windfall, small business, financial constraints, entrepreneurship, Mega Millions, Powerball, lottery

JEL Classification: G32, L26, M13

Suggested Citation

Cespedes, Jacelly and Huang, Xing and Parra, Carlos, The 'Jackpot' Question: How Do Cash Windfalls Affect Small Business Growth? (December 1, 2019). Available at SSRN: https://ssrn.com/abstract=3301451 or http://dx.doi.org/10.2139/ssrn.3301451

Jacelly Cespedes (Contact Author)

University of Minnesota - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

HOME PAGE: http://sites.google.com/site/jacellycespedes/

Xing Huang

Washington University in St. Louis - Olin Business School ( email )

Simon Hall 211
Washington University in St. Louis
St. Louis, MO 63130
United States

Carlos Parra

Pontifical Catholic University of Chile - School of Business ( email )

Vicuna Mackenna 4860
Santiago
Chile

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

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