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Sunday, June 01, 2008

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.

    Posted by on Sunday, June 1, 2008 at 02:25 PM in Academic Papers, Economics | Permalink  TrackBack (0)  Comments (2)


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