Working Paper: NBER ID: w14035
Authors: Peter J. Kuhn; Peter Kooreman; Adriaan R. Soetevent; Arie Kapteyn
Abstract: In the Dutch Postcode Lottery a postal code (19 households on average) is randomly selected weekly, and prizes - consisting of cash and a new BMW - are awarded to lottery participants living in that postal code. On average, this generates a temporary, unexpected income shock equal to about eight months of income for about one third of the households in a typical winning code, while leaving the incomes of nonwinning, neighboring households unaffected. We study the responses of consumption and reported happiness of both winners and nonwinners to these shocks. Consistent with simple models of in-kind transfers, the overwhelming majority of households who won a BMW convert it into cash. With the exception of food away from home, the only 'own' effects of cash winnings we detect are on durables expenditures and car consumption; these results support a version of the permanent income hypothesis in which durable spending is used to smooth consumption. We detect social effects of neighbors' winnings on two types of consumption: cars and exterior home renovations. Six months after the fact, winning the lottery does not make households happier, nor do neighbors' winnings reduce happiness.
Keywords: income shock; social effects; permanent income hypothesis; lottery
JEL Codes: C21; D12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Winning the postcode lottery (H27) | Increase in food expenditures away from home (D12) |
| Winning the postcode lottery (H27) | Reduction in the average age of a household's main car (D15) |
| Winning the postcode lottery (H27) | No significant increase in reported happiness (I31) |
| Neighbors' winnings (H27) | Positive impact on car consumption of nonparticipants (D16) |
| Neighbors' winnings (H27) | Positive impact on exterior home renovations of nonparticipants (R21) |
| Winning the postcode lottery (H27) | No significant influence on other spending categories (H59) |