June 2, 2008

Keepin up with the van den Bergs?

Hyacinth Bucket of the BBC comedy, 'Keeping Up Appearances'An odd economics study about Dutch lottery winners, what they do with their money and, most interestingly, how non-winning neighbors react when a winner lives nearby:

Each week, [the Dutch Postcode Lottery (PCL)] 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. In addition, a randomly chosen subet of those households receive a significant part of their transfer in kind (in the form of a new BMW).


[W]e find that the vast majority of BMW winners trade their BMW for cash, despite significant tax or transactions costs associated with this. Consistent with a simple life-cycle model of consumption, we do not detect any own effect of winning the postcode lottery on most components of households’ expenditures, including food at home, transportation, and total monthly outlays. Own effects are, however detected for durables expenditures and car consumption.

Meaning, winning the lottery doesn't necessarily change how much food the winners eat at home, the amount of travel - presumably local - that they do, or how much money they spend in any given month. However, they do use their lottery winnings to buy durables (cars, refrigerators, stoves, furniture, etc.).

We also detect an effect of temporary income shocks on food expenditures away from home

Lottery winners also eat out at restaurants more often.

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 non-winning codes. Further, we find that non-winning households who live next door to PCL winners are significantly more likely to purchase a car in the six months after the lottery than non-winning households located elsewhere, and that non-winning 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 non-winning households located elsewhere.


In addition to the monetary prizes, one of the street-prize winners wins a new BMW. The BMW winner is chosen by randomly selecting one of the winning lottery tickets. BMW winners have the option of receiving the cash value of the BMW in lieu of the car itself. This however involves a substantial tax penalty, since the PCL authority pays the 25% lottery tax for winners who accept the BMW in kind, but not for those who choose the cash equivalent (about €25,000). Of course, winners also have the option of selling their new BMW, and incurring any associated transactions costs.

What I find interesting is that despite having a car that is, presumably, less expensive and less "nice" than a BMW, most winners of the BMW trade in that car for cash, even though it costs them more money to do so (in the form of a 25% tax and transaction costs), even though they could have chosen to take all of the money (instead of the car) without any penalty. Why is this? Are the BMWs too expensive to operate over time (e.g., gas, insurance, maintenance, etc.)? Are the BMWs more subject to theft? Or are the winners "bored" of the Beemer after the neighbors (and themselves) have been sufficiently impressed?

We do detect social effects of lottery winnings, but only for two goods: car consumption and exterior home renovations, both of which are likely to be easily, and repeatedly, visible to a household’s neighbors. While we observe a strong cross-sectional association between (non-lottery) income and self-reported happiness in our data, lottery winnings do not make households happier, nor do they make neighboring households less happy. Together, these results are consistent with a scenario in which (a) happiness is more linked to permanent than to short-term increases in income, and (b) at least in the short term, income comparisons with one’s residential neighbors do not affect happiness.

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..., 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 using lottery-based or other research designs.

I don't know. On the one hand, I agree that there are probably a lot of other factors that may be influencing the purchase behavior of the non-winning neighbors. On the other hand, I think there's a lot to be said for the idea of "keeping with the Jones" (or, as the authors of this study put it, "keeping up with the van den Bergs") as a psychological motivator.

HT: Economist's View

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