Does Lottery Causes Bankruptcy in Surrounding Neighborhood?

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According to research released by the Federal Reserve Bank of Philadelphia, winning the lottery can be bad for your neighborhood. Apparently, it causes the neighbors to go bankrupt.

Does Lottery Causes Bankruptcy in Surrounding Neighborhood?

The Federal Reserve Bank of Philadelphia just released a report that found there was a significant jump in bankruptcies around families that have won a big lottery jackpot.

The reason? Economists theorize that the neighbors might see the good fortune on the other side of the fence and feel pressure to accumulate assets of their own, including cars and clothes they cannot afford.

“Income inequality induces poorer neighbors to consume more visible (rather than invisible) commodities to signal their abilities to ‘keep up with the Joneses’ to their richer neighbors,” wrote economists Sumit Agarwal, Vyacheslav Mikhed and Barry Scholnick. “This tendency can lead to additional and unsustainable borrowing among the relatively poor to finance this additional conspicuous consumption, which can eventually result in financial distress and bankruptcy.”

The economists analyzed lottery prizes and bankruptcy filings over 10 years, then sorted the data down to six-digit postal codes that on average contained only 13 households. What they found revealed the financial effect that lottery winner’s have on their neighbors.

As the study concluded: For every $1,000 increase in the lottery prize, there was a 2.4% increase in filings for bankruptcy by the neighbor’s winners.

“These results are more pronounced for low-income neighborhoods and high income-inequality areas,” they wrote.

The economists also found “evidence that those who filed for bankruptcy after a larger lottery win of a close neighbor have significantly larger holdings of visible assets (e.g., cars, motorcycles, houses) relative to the holdings of these same visible assets by those who filed for bankruptcy after smaller lottery wins of a close neighbor."

As the economists suggest, people who feel they are poorer than their neighbors might feel they need to spend more, thus racking up debt. Because that debt cannot be repaid, the neighbors turn to bankruptcy.

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