Consumption responses to income shocks through lottery winning

• Main Authors: KIM, Seonghoon, KOH, Kanghyock
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2024
• Subjects: Lottery; Consumption; Marginal propensity to consume; Liquidity constraint; Risk preference; Asian Studies; Behavioral Economics; Health Economics
• Online Access: https://ink.library.smu.edu.sg/soe_research/2725; https://ink.library.smu.edu.sg/context/soe_research/article/3724/viewcontent/Consumption_Responses_to_Income_Shocks_through_Lottery_Winning__with___R_R_at.pdf
• Institution: Singapore Management University

We study the effects of lottery winning on consumption spending using newly available household survey data in Singapore. We find strong consumption responses to a transitory income shock via lottery wins. Lottery winners spend about half of their prizes within 12 months of winning. We show that consumption responses are stronger among households with more binding liquidity constraints and less risk aversion, which is consistent with the standard life-cycle model. The strong consumption response suggests that fiscal stimulus policies or other public transfer programs could be an effective means of boosting consumption spending of the economy in the short run.