Close neighbors of lottery winners in Canada tended to spend more on conspicuous goods, put more money into speculative investments such as stocks, borrow more money — and eventually declare bankruptcy, Bloomberg News reported. “The larger the dollar magnitude of a lottery prize of one individual in a very small neighborhood, the more subsequent bankruptcies there will be from other individuals in that neighborhood,” says the latest version of a working paper from the Federal Reserve Bank of Philadelphia by Sumit Agarwal of Georgetown University, Vyacheslav Mikhed of the Philadelphia Fed, and Barry Scholnick of the University of Alberta. It’s titled: “Does the Relative Income of Peers Cause Financial Distress? Evidence from Lottery Winners and Neighboring Bankruptcies.” An earlier version of their paper got a flurry of publicity in 2016 by presenting evidence from bankruptcy filings that neighbors were trying to keep up with the lottery winner in their midst. A telltale sign was that they raised spending on things that everyone in the neighborhood could see, such as cars, but not on indoor items like furniture. The new version adds some important insights, co-author Mikhed explained in an email. One is that neighbors who filed for bankruptcy tended to have more of their assets in high-risk investments such as stocks vs. low-risk ones like insurance and cash.
