Friday, August 12, 2011

Lottery Winners Do Not Avoid Bankruptcy

This short post by Alex Tabarrok is well worth thinking about….

August 11, 2011 at 10:33 am in Data Source, Economics | Permalink

The rags to riches to rags story of a poor, unemployed fellow who wins the lottery, blows the cash, and ends up just as poor and unemployed as he began is a common trope. (Here is a classic in the genre). In a paper just published in the Review of Economics and Statistics (gated, free version here), Hankins, Hoekstra and Skiba argue that the rags to riches to rags story has a systematic component.

The authors link records of lottery winners to bankruptcy records. The use of the lottery is a great randomization device, although obviously it restricts the sample to people who play the lottery.

The central finding is this: people who win large amounts are just as likely to end up bankrupt as people who win small amounts. People who win a large amount, $50,000 to $150,000, have a lower bankruptcy rate immediately after winning but a higher bankruptcy rate a few years later so the 5-year bankruptcy rate for the big winners is no lower than for the small winners. Amazingly, by the time the big winners do go bankrupt their assets and debts are not significantly different from those of the small winners. The big winners who ended up bankrupt could have paid off all of their debts but chose not to.

N.B. the result is not that most lottery winners go bankrupt or that winning money doesn’t help people–the result, as Robin Hanson might say, is that bankruptcy isn’t about money.

Brent

3 comments:

  1. Somehow, it's not surprising to see that lottery winners could go bankrupt. After all, it doesn't go that once you win, you'll never run out of money. Lottery winners should know the importance of money management if they want to make it grow.

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  2. Spot on, Bennie! I think lottery winners should also be cautious in handling their finances. They can enjoy their winnings at some point, but they have to think of saving and making use of their money wisely.

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  3. You are true Jaden Allred, They should know how to save, Because it just a matter of money, And everything could be happen, They should seek into financial advice that could help them how to manage their money.



    Filing for bankruptcy

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