The Own and Social Effects of an Unexpected Income Shock: Evidence from the Dutch Postcode Lottery

Working Paper No. 14035 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...

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Bibliographic Details
Published in:NBER Working Paper Series 2008-05, p.14035
Main Authors: Kuhn, Peter J, Kooreman, Peter, Soetevent, Adriaan R, Kapteyn, Arie
Format: Article
Language:English
Subjects:
Data collection
Economic theory
Economics
Expenditures
Happiness
Households
Hypotheses
Neighborhoods
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Summary:Working Paper No. 14035 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.
ISSN:0898-2937
DOI:10.3386/w14035