Your Neighbor Winning the Lottery Might Send You into Bankruptcy


Most of us are familiar with the idea that winning the lottery can sometimes backfire: having so much money at once might not allow you to learn how to spend, friends and family can wear you down, the list goes on – but what about how it affects your neighbors?

The Federal Reserve of Bank recently released a working paper showing how income inequality can cause financial distress, specifically if it’s caused by exogenous shocks (like winning the lottery). Researchers saw an increase in bankruptcy filings when someone in a neighborhood won a lottery (2.4% to be exact).

Homes and cars would increase in value, with more visible wealth (fancy food, clothes, furniture, etc.) and less invisible wealth (like investments). Visible wealth is not a sign of financial distress on its own – buying visibly expensive things and signal to others is common – but accumulating mostly visible wealth doesn’t allow for much in returns. It’s simply a way to signal or demonstrate to the lottery winner.

According to the paper: for every $1,000 increase in lottery winnings, bankruptcy filings would increase 2.4% – the bottom line being that neighbors are driven to overspending in order to keep up with the lottery winner(s), until they have nothing left.

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