Estimating the Effect of Unearned Income on Labor Earnings, Savings, and Consumption: Evidence from a Survey of Lottery Players

Author:

Imbens Guido W1,Rubin Donald B2,Sacerdote Bruce I3

Affiliation:

1. Department of Economics, 8256 Bunche Hall, UCLA, 405 Hilgard Avenue, Los Angeles, CA 90095, Berkeley, and NBER.

2. Department of Statistics, Science Center 709, Harvard University, Cambridge, MA 02138.

3. Department of Economics, 6106 Rockenfeller Hall, Dartmouth College, Hanover, NH 03755.

Abstract

This paper provides empirical evidence about the effect of unearned income on earnings, consumption, and savings. Using an original survey of people playing the lottery in Massachusetts in the mid-1980's, we analyze the effects of the magnitude of lottery prizes on economic behavior. The critical assumption is that among lottery winners the magnitude of the prize is randomly assigned. We find that unearned income reduces labor earnings, with a marginal propensity to consume leisure of approximately 11 percent, with larger effects for individuals between 55 and 65 years old. After receiving about half their prize, individuals saved about 16 percent. (JEL C81, D12, E21, J22, J26)

Publisher

American Economic Association

Subject

Economics and Econometrics

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