Household Responses to Phantom Riches

Fisher College of Business Working Paper No. 2021-03-008

Charles A. Dice Center Working Paper No. 2021-08

91 Pages Posted: 24 May 2021 Last revised: 3 Jul 2023

See all articles by Samuli Knüpfer

Samuli Knüpfer

Aalto University School of Business; BI Norwegian Business School; Research Institute of Industrial Economics (IFN)

Ville Rantala

University of Miami - Department of Finance

Erkki Vihriälä

Aalto University - Department of Finance

Petra Vokata

Ohio State University (OSU) - Department of Finance; Center for Economic and Policy Research

Date Written: July 3, 2023

Abstract

We study household responses to "phantom riches"—the illusion of attaining substantial wealth—by using administrative data on Ponzi scheme investors. An event-study design exploiting staggered entry shows investors experience a 6 percent labor income loss. Income first declines when an investor joins the scheme, consistent with distorted beliefs lowering labor supply. The scheme’s collapse evokes a further decrease, which we attribute to financial stress caused by the collapse. Investors also face higher unemployment and indebtedness and shy away from delegated investments. The long-run income loss twice exceeds the direct investment loss and substantially adds to the social cost of fraud.

Keywords: Investment fraud, distorted beliefs, financial stress, consumer financial protection, Ponzi scheme

JEL Classification: G11, G40, G51, J22

Suggested Citation

Knüpfer, Samuli and Rantala, Ville and Vihriälä, Erkki and Vokata, Petra, Household Responses to Phantom Riches (July 3, 2023). Fisher College of Business Working Paper No. 2021-03-008, Charles A. Dice Center Working Paper No. 2021-08, Available at SSRN: https://ssrn.com/abstract=3850928 or http://dx.doi.org/10.2139/ssrn.3850928

Samuli Knüpfer

Aalto University School of Business

P.O. Box 21210
AALTO, 00076
Finland

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

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Research Institute of Industrial Economics (IFN)

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Ville Rantala

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

Erkki Vihriälä

Aalto University - Department of Finance ( email )

Finland

Petra Vokata (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Center for Economic and Policy Research ( email )

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