(Bloomberg) -- As if you needed proof that trying to keep up with the Joneses isn’t a good idea, here it is: Close neighbors of lottery winners in Canada tended to spend more on conspicuous goods, put more money into speculative investments such as stocks, borrow more money—and eventually declare bankruptcy.
“The larger the dollar magnitude of a lottery prize of one individual in a very small neighborhood, the more subsequent bankruptcies there will be from other individuals in that neighborhood,” says the latest version of a working paper from the Federal Reserve Bank of Philadelphia by Sumit Agarwal of Georgetown University, Vyacheslav Mikhed of the Philadelphia Fed, and Barry Scholnick of the University of Alberta. It’s titled: “Does the Relative Income of Peers Cause Financial Distress? Evidence from Lottery Winners and Neighboring Bankruptcies.”
An earlier version of their paper got a flurry of publicity in 2016 by presenting evidence from bankruptcy filings that neighbors were trying to keep up with the lottery winner in their midst. A telltale sign was that they raised spending on things that everyone in the neighborhood could see, such as cars, but not on indoor items like furniture.
The new version adds some important insights, co-author Mikhed explained in an email. One is that neighbors who filed for bankruptcy tended to have more of their assets in high-risk investments such as stocks vs. low-risk ones like insurance and cash. That’s consistent with the theory that they were hoping to make a killing in the market and even things up with the lottery winner. Another new finding: Neighbors of lottery winners tended to borrow more, compared with Canadians who weren’t neighbors of lottery winners.
The researchers focused on small lottery winnings, ranging from C$1,000 to C$150,000 (roughly $800 to $120,000). One reason for the focus on small winners was that winners of bigger jackpots tended to move out of their neighborhoods. A second was that winners of small prizes were more likely to keep their good luck a secret. The researchers theorized that people might not amp up their own spending so much if they knew that a lottery prize was the reason for their neighbor’s sudden prosperity.
The economists collected data on 7,337 lottery prizes from an unnamed Canadian province, dating from 2004 to 2014. They narrowed their search to the effects on neighbors within areas that share six-digit postal codes, which have a median of just 13 households. They found that a prize equal to the median annual income (C$29,000) tended to raise the bankruptcy rate of the neighbors by 6.6 percent.
One heartening sign: There was no evidence that the people who filed for bankruptcy were especially likely to list gambling as a cause of their financial distress. That indicates that they weren’t superstitiously buying more lottery tickets in hopes that the neighbor’s good luck would rub off on them.
Previous research had shown that neighbors of lottery winners spent more on conspicuous consumption. Theoretically, though, they could have done so in ways that didn’t jeopardize their financial health—say, by working more to increase their incomes. The new study shows that neighbors—some of them, anyway—did indeed imperil their financial health to keep up with the Joneses.
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