Lotteries, spending & happiness
Here's a lovely new paper (pdf) about the effects of lottery wins.
The authors looked at the Dutch postcode lottery which, cunningly, gives prizes to all ticketholders within a particular postcode. They found:
1. Non-winners whose neighbours won a prize tended to spend more on cars and exterior home improvements than other non-winners. This suggests there are social effects in consumption; we spend on conspicuous items to keep up with the Jones or van den Bergs. Robert Frank is right (pdf).
2. Winners do not increase spending across the board. Rather, their winnings go mainly upon durable goods (an exception being that they eat out more). This is consistent with the permanent income hypothesis, that windfalls do not increase permanent consumption. This suggests there won't be large, permanent effects of the US tax rebates and rise in the UK personal tax allowance.
3. A lottery win has "no detectable effects on households' reported happiness" six months after the win. However, higher income from normal sources is associated with greater happiness.
This suggests money might buy happiness because of what it represents - that we have worked hard and saved hard - rather than because of what it buys. Or maybe the Dutch are more puritanical than the rest of us.
The authors looked at the Dutch postcode lottery which, cunningly, gives prizes to all ticketholders within a particular postcode. They found:
1. Non-winners whose neighbours won a prize tended to spend more on cars and exterior home improvements than other non-winners. This suggests there are social effects in consumption; we spend on conspicuous items to keep up with the Jones or van den Bergs. Robert Frank is right (pdf).
2. Winners do not increase spending across the board. Rather, their winnings go mainly upon durable goods (an exception being that they eat out more). This is consistent with the permanent income hypothesis, that windfalls do not increase permanent consumption. This suggests there won't be large, permanent effects of the US tax rebates and rise in the UK personal tax allowance.
3. A lottery win has "no detectable effects on households' reported happiness" six months after the win. However, higher income from normal sources is associated with greater happiness.
This suggests money might buy happiness because of what it represents - that we have worked hard and saved hard - rather than because of what it buys. Or maybe the Dutch are more puritanical than the rest of us.
Minor correction: windfalls DO increase permanent income, and so should increase consumption according to the permanent income hypothesis, just not dollar-for-dollar.
For example, for an infinitely-lived household, with 5% interest rates, a $100 windfall would increase permanent income by $5 per year, and we would expect to see some (close to $5) increased annual consumption of things like restaurant meals.
Posted by: Nick Rowe | June 06, 2008 at 02:19 PM
Or "reported happiness" is just a silliness. Or "reported happiness" is not entirely silly, but is slippery e.g. because people quickly recalibrate what they report, to allow for their new condition.
Posted by: dearieme | June 06, 2008 at 05:54 PM
.. or people get an extra $5 pa and see their peers on $10 pa more so are not as happily reported. When we all had nothing we were all much happier. Its only our envy of others which gives us reported unhappiness.
Posted by: kinglear | June 07, 2008 at 01:15 PM