The Social Effects of Unexpected Income

People who believe consumption is driven, in part, by the consumption of neighbors and friends will like these results [open link]. The source of the data is:

the Dutch Postcode Lottery (PCL). Each week, this lottery allocates a prize to participants in a randomly chosen postcode (containing 19 households on average). About one third of the Dutch population participates in the lottery. A participant wins €12,500 per ticket. In addition, one of the participants wins a BMW. From an experimental design perspective, the lottery provides PCL participants in the winning code with an unexpected temporary income shock equal on average to about eight months of income, while leaving all other households’ incomes unchanged.

How does winning the lottery impact on consumption of neighbors?:

Turning to social effects, we detect statistically significant effects of neighbors’ lottery winnings on car consumption and exterior home renovations. For example, PCL nonparticipants who live in winning codes are more likely to acquire a new car in the six months after the lottery win than nonparticipants living in nonwinning codes. Further, we find that nonwinning households who live next door to PCL winners are significantly more likely to purchase a car in the six months after the lottery than nonwinning households located elsewhere, and that nonwinning households living in postcodes where a large number of households won the PCL are more likely to start a major exterior home renovation in the six months since the lottery than nonwinning households located elsewhere.

The authors comment on these results:

What simple models of consumer behavior might explain the social effects estimated in our data? While it is tempting to interpret our estimates as reflective of a psychological need to (be seen to be?) “keeping up with the van den Bergs”, we note that they could also be driven by other factors. For example, our results for home renovations are also consistent with a scenario where a simultaneous lottery win provides a focal point (and perhaps eases liquidity constraints) for voluntary contributions to the local public good of neighborhood (or even building) appearance. Social spillovers in car consumption in our data could be driven by information sharing about cars and/or dealers (Grinblatt et al, 2004), or by something as simple as households passing money to immediate neighbors, who might be family members. Also, it is worth reemphasizing that our estimates do not distinguish ‘imitative’ consumption patterns (I buy a car because you buy one) from more general effects of neighbors’ incomes on a household’s consumption. Still, we do find that households’ consumption of visible, durable goods (and only such goods) are affected by genuinely exogenous shocks to their neighbors’ incomes. We find these effects intriguing and deserving of further study...

Finally, we note that, when taken together, our own and social effects results can ... be seen as ‘good news’ for ... fiscal policies such as unexpected tax rebates designed to stimulate consumer spending: To the extent that the latter aim specifically at “big-ticket items” (mostly durables) –where consumer spending is most cyclically sensitive to begin with—our results suggest that unexpected income shocks (such as tax rebates) may not only have substantial ‘own’ effects on consumption, but significant social multiplier effects as well. These social multipliers are distinct from, and would presumably operate in addition to, the usual Keynesian multipliers that have been studied in this context.

I'm not so sure how important the last change in the multiplier would be unless it is for the case where one neighbor gets a tax rebate and the other doesn't. When everyone gets the tax rebate, it might affect how the money is spent - perhaps it would be biased toward things that neighbors can easily observe - but the effect on total spending may not be that large. That is, when everyone wins the lottery, the social effect may have more impact on the type of spending than on the total amount that households spend.

Comments

[Lafayette]

All boats rise

Also, it is worth reemphasizing that our estimates do not distinguish ‘imitative’ consumption patterns (I buy a car because you buy one) from more general effects of neighbors’ incomes on a household’s consumption.

First, these are interesting but all the same predictable results. Why shouldn’t exogenous factors not provoke the same behaviour as non-exogenous factors? That which provokes this mimicry is a sociological response, aka, “keeping up with the Joneses”.

The response depends, however, upon the nature of the shock. If my neighbour wins a substantial lottery, he’ll likely move out, not refurbish his home. If he wins a more modest lottery, he will likely behave as in the Dutch study.

So, it depends upon how much money is in play. The Dutch may wish to distribute randomly the money, according to postal code. I don't see the difference to the French lottery where individuals win similar amounts just as randomly.

This phenomenon is interesting, admittedly, but I doubt seriously it should be given any serious consideration as a viable economic tool to be taken out of our policy handbag when times get a bit tough. If lotteries were to adopt it, it could be useful; however, only if the amounts were modest.

If done too often, it can however inevitably provoke negative feedback. I live in France … wherein I have witnessed that people prefer that you live either just as miserably or as well as everyone else, rather than be better off or much worse off than they.

I am amazed at this sort of French conformism. There are, therefore, in some societies, great social pressure to "remain the same".

Thus, envy does not provoke necessarily always neighbours to want to mimic one another.

Still, we do find that households’ consumption of visible, durable goods (and only such goods) are affected by genuinely exogenous shocks to their neighbors’ incomes. We find these effects intriguing and deserving of further study...

As said above, keeping up with the Joneses is fine, but being very much better off as a result, such as to become unique, is likely to be not so readily accepted. One must never underestimate the sociological force amongst humans for adhering to normative behaviour. At least in Europe. Perhaps America is different culturally.

I prefer another policy tool. France is betting heavily on alternative, renewable energy sources. So, it is giving substantial tax-credits to those who install geo- or aero-thermal heat pumps – as much as half the cost of the system. I would like to see some small French towns, having become shabby over time, that provide similar incentives to enhance facades to prettify the town.

In that sort of tide, all boats rise.