The effects of Winning the Lottery
Joe Price
October 14, 2004
In their paper, Imbens et al. (2001) examine the affect that winning the lottery has on the winners subsequent earnings. They are able to calculate earnings elasticities for each of six years following the winning. They are able to compare these elasticities between big winners (payout of greater than 100,000 per year for 20 years), all winners, and non-winners. A striking pattern in this table 4 is that the elasticities initially increase, reach a peak and then slowly decrease. The increase period probably reflects a gradual easing into the new lifestyle, while the decrease period probably indicates the possibility of leisure saturation.
Leisure Saturation
This would be an interesting phenomenon in which we have an innate need to be anxiously engaged in something. We can actually become saturated with leisure to the point that the returns to leisure may actually become negative. It is possible that the presence of labor actually increases the marginal utility of leisure. This gives credence to the thought that there is a time to play and a time to work.
One way to test this is to look at the labor decisions of big lottery winners.[1] It would be interesting to see what factors affect this leisure saturation. It would be interesting to see how many of these people actually go back to school to be trained in something that they enjoy doing, or how many of them go back to the job that they had before. It would be interesting to see if the probability of returning to your old job is correlated with your level of education prior to winning. This would provide me a way to test between two hypotheses about the effects of education. One hypothesis is that more education creates more options for the jobs we can obtain and so we are able to match with a job that we really enjoy most. The other is that more education actually opens up options that we wouldn’t enjoy but we take them because they pay more. In other words, the immediate lure of high wages pulls us away from the job we would take if we weren’t so myopic.
Effect on Marriage
This section would also have a strong tie to the case of inheritance. In this case, when one of the members of a marriage receives a large shock in assets, what is the impact on the marriage. One possibility is that marriage has a difficult time with large shocks in either direction. For example, it is probably the case that when there are major layoffs in an area that is accompanied by a rise in the divorce rate. This is probably because our personal behavior changes when we experience major asset shocks, and this behavior in turn affects our marital stability. This is probably the case for increases in income as well.
Another reason why winning the lottery might have an impact on marital stability is that the increased assets may increase the marital options for the winning party. If your assets make you a more attractive mate on the marriage market, then an increase in assets increases the supply of potential spouses. Thus a lottery winner may decide to re-optimize given the new constraint set. This affect would depend on the laws that govern the lottery winnings or analogously the inheritance laws. If the inheritance laws stipulate that the winnings would all belong to the individual in the case of divorce then the affect would just be for that individual who won since they would have the enlarged choice set. However, if the winnings are split between the two then they may both be able to re-optimize. In the former case the gender of the winner may matter if there are gender specific issues with regards to the willingness to dissolve a marriage in search of another partner as well as how the marriage market treats wealth differently by gender. These effects could be teased out by looking at variation across states in the laws governing who gets the money if divorce occurs.[2]
Reference:
Imbens, Guido W.; Rubin, Donald B., and Sacerdote, Bruce I. “Estimating the Effect of Unearned Income on Labor Earnings, Savings, and Consumption: Evidence from a Survey of Lottery Players.” AER 2001 Sep; 91(4): 778-794.
[1] There is probably already a rich literature on this topic, so it would be nice to find some of these sources.
[2] This was a suggestion of Bob Hutchens.