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

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