Policy Research

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

Guido W. Imbens, Donald B. Rubin, Bruces Sacerdote

Summary

The authors attempt to understand the effect of knowledge of unearned income through studying a sample of random sample of lottery winners of differing amounts. They find a significant difference in the effect of a modest winning (defined as $15,000 annually) and a significant winning. Those who won a modest prize did not change the amount they worked, earned, or saved. Those who won a significant prize reduced their hours worked and earnings, and increased their “big ticket” expenditures such as houses and cars. They also found a small positive effect of a modest winning on labor supplied for those with zero income prior to the winning.

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Policy Implications

Providing people, particularly poor people, with a modest unexpected income does not decrease their willingness to work. In fact, for the very poor, it may increase it. However, a large windfall will decrease the average person’s willingness to work as well as save.