It’s common knowledge that the lottery can sometimes have a negative impact on prizewinners, but what about their neighbors?
Research released this month by the Federal Reserve Bank of Philadelphia found that winning the lottery is linked to a rise in bankruptcy filings among nearby households, the Wall Street Journal reports.
The study theorizes that the jump in bankruptcy stems from the tendency of community members to keep up with the lifestyle of their newly rich neighbor by spending outside of their means.
“Income inequality induces poorer neighbors to consume more visible (rather than invisible) commodities to signal their abilities to ‘keep up with the Joneses’ to their richer neighbors,” the study says.
Researchers analyzed the lottery prizes and bankruptcy filings in a Canadian community over a 10-year period, focusing on neighborhoods with a single lottery win.
The study found that winning the lottery raises the likelihood that a close neighbor will file for bankruptcy 2.4 percent for every $1,000 increase in lottery prize. Researchers discovered that the larger the holdings of visible assets, such as cars and houses, the larger the lottery prize of their neighbor.
Those who fall victim to this phenomenon often feel poor in comparison to their lottery-winning neighbors, so they begin to make large purchases in order to compensate. Due to lower income, these purchases often lead to debt, causing financial difficulties such as bankruptcy.
“This tendency can lead to additional and unsustainable borrowing among the relatively poor to finance this additional conspicuous consumption, which can eventually result in financial distress,” the study states.
Researchers found that these results are even more pronounced in both low-income and high income-inequality areas.
The study was originally circulated in a Philadelphia Fed working paper and performed by economists Sumit Angarwal of National University of Singapore, Vyacheslav Mikhed of Philadelphia Fed’s Payment Cards Center and Barry Scholnick of University of Alberta.