Financial Consequences of Winning the Lottery

For individuals and families facing financial ruin one would assume that a lottery win would be a perfect, if lucky, way out of hardship. Contrary to this, however, an analysis of a small, unique set of people—Floridian lottery winners linked to bankruptcy records—finds that lottery winners are more likely to claim bankruptcy than others who were in a similar financial state previous to their win (pdf).

A fundamental question faced by policymakers is how best to help individuals who are in financial trouble. This paper examines the consequences of the most basic approach: giving people large cash transfers. To determine whether this prevents or merely postpones bankruptcy, we exploit a unique dataset of Florida Lottery winners linked to bankruptcy records. Results show that although recipients of $50,000 to $150,000 are 50 percent less likely to file for bankruptcy in the two years after winning relative to small winners, they are equally more likely to file three to five years afterward. Furthermore, bankruptcy filings indicate that even though the median winner of a large cash prize could have paid off all of his unsecured debt or increased equity in new or existing assets, she chose not to do either. Consequently, although we cannot be sure other recipients of financial assistance would react in the same way lottery players did, our results do suggest that some skepticism regarding the long-term effect of cash transfers may be warranted.

via The Undercover Economist