Why a neighbor winning the lottery can send YOU bankrupt: Trying to keep up with winners' spending makes people broke
- New study reveals winning the lottery can push neighbours to overspend
- Chance of neighbours' bankruptcy increases 2.4 percent per $1,000 won
- The research suggests that sudden income gap leads to financial distress
If your neighbour wins the lottery, you may want to consider relocating.
A new study examines the effects of income inequality in Canadian neighbourhoods, revealing that households near a lottery winner are more likely to declare bankruptcy.
As the lottery prize increases, the likelihood of bankruptcy does as well, linking financial distress to the widening income disparity as neighbours try to keep up.
If your neighbour wins the lottery, you may want to consider relocating. A new study examines the effects of income inequality in Canadian neighbourhoods, revealing that households near a lottery winner are more likely to declare bankruptcy
The study conducted by the Federal Reserve Bank of Philadelphia found that for every $1,000 of lottery winnings, the probability of bankruptcy in the immediately surrounding area will increase by 2.4 percent.
A sudden increase in wealth amidst a small community can put pressure on neighbours to keep up, thus prompting them to spend more on vanity objects, like cars and motorcycles, Vox explains.
The researchers investigated lottery winnings and bankruptcy filings within six-digit postal codes, generally containing about 13 households.
Lottery prizes of random amounts were studied to allow for comparison between varying sudden income gaps.
The team found that a lottery win in a particular neighbourhood can be a major blow to the community, leading to a 'significant increase in bankruptcy filings within the winner's postal code,' within the first two years.
This is even more significant in low-income and high income-inequality areas.
Researchers examined the data of bankruptcy balance sheets, provided by the Canadian bankruptcy regulator, the Office of the Superintendent of Bankruptcy (OSB) Canada.
The records revealed that neighbours that filed for bankruptcy commonly had 'conspicuous assets' that increased in value relative to the lottery prize – as lottery prize increases, so do the value of visible assets, like cars and houses on the balance sheets of bankrupt neighbours.
Neighbours spent more on showy material goods, a means of competing or keeping up with suddenly wealthy neighbours, the research suggests. A sudden increase in wealth can put pressure on neighbours to keep up, thus prompting them to spend more on vanity objects, like cars and motorcycles
These neighbours did not appear to increase their invisible assets, however, such as cash and pensions.
This suggests people spent more on showy material goods, a means of competing or keeping up with suddenly wealthy neighbours.
The study provides a micro-level analysis of the idea that a monetary shock, like a neighbour winning the lottery, can 'result in an exogenous and randomly sized shift in the income distribution of that specific neighbourhood,' the authors write.
'This is because, on the date of the lottery win, the income of the lottery winner will increase by the random size of the lottery prize, but the incomes of her very close neighbors will remain unchanged.'
And, beyond the scope of the lottery, the research provides a glimpse into the larger issue of financial distress as it relates to differences of income within a single community.
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