When people win the lottery, their less-lucky neighbors often drive themselves into financial ruin trying to keep up, according to a provocative new study from the Federal Reserve Bank of Philadelphia. The more money the lottery winner gets, the worse off their neighbors become, the research suggests.
The paper's authors -- Sumit Agarwal of the National University of Singapore, Vyacheslav Mikhed of the Philadelphia Fed, and Barry Scholnick of the University of Alberta -- looked at lottery winners and their neighbors in Canada. They found that for every $1,000 Canadian dollars ($720) a person won, the likelihood of a neighbor declaring bankruptcy increased by 2.4 percent.
The researchers also found that big purchases meant to signal wealth, which economists call "conspicuous consumption," are behind the money troubles of people whose neighbors win the lottery.
The scenario goes something like this: Your newly rich neighbor buys a new car or two, and a motorcycle, and then a boat. She remodels her house. Every day, there are new deliveries and construction trucks passing your house, reminding you of just how banal your own perfectly average driveway looks. You don't really have the money for a new car, but yours is so outdated, especially sitting next to your neighbor's fancy new Tesla. The next thing you know, you’re burning up your credit card in an effort to keep up.
This paper isn't just a warning in case the person down the street wins the jackpot, though. It's a study that takes income inequality to its extreme conclusion and asks what happens to people who get left behind. And at a time when the divide between the economy’s haves and have-nots is widening, it’s worth considering what kind of effect the growing class of rich people is having on all of us.
We aren't supposed to think about growing wealth as a zero-sum game in which one person's gain is another's loss. The basic theory of capitalism is that a rising tide lifts all boats, and when someone gets a big windfall, the markets give them an incentive to invest that money into other projects that will also make money, so the whole economy grows together.
This research, however, shows that really stark income or wealth inequality can have the opposite effect on households: It can drive poorer neighbors into debt. Thus, income inequality begets yet more income inequality. The question is, when does that become a cycle that cannot be stopped?
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