Economic Effects of Wealth Shocks
A central question in economic analysis is how wealth impacts economic behavior. Yet, there are many settings in which it has proven elusive to obtain credible estimates of the causal impact of wealth. For example, estimates of the elasticity of labor supply with respect to unearned income differ considerably across studies and there is no consensus about the relationship between wealth and risk-taking. One important reason for these differences is that it is rarely feasible to randomly assign substantial amounts of wealth to individuals. As a result, researchers often have to resort observational studies, where potential problems of omitted variable bias and reverse causation loom large. In the research described in this proposal, we plan to exploit the randomized assignment of wealth in three large samples of lottery players that have been matched to detailed data from administrative records. The samples satisfy a number of methodological desiderata that significantly strengthen the ability to make inferences relative to earlier work. The work described in this proposal should therefore deliver credible and statistically precise estimates of the causal impact of wealth on labor supply, job search, stock market participation, financial risk-taking, entrepreneurship and crime.
Final report
Scientific final report for research project P15-0615:1 "Economic Effects of Wealth Shocks"
Purpose and development
The purpose of the project was to study how wealth shocks in the form of lottery prizes affect economic behavior. The original project application specified several sub-projects based on administrative register data that differ mainly in the outcome studied, but the application also contained a proviso that part of the project may be devoted to other projects within the same overall research agenda. In line with this proviso, the project time has been partly devoted to conducting a survey of lottery players and analyzing data from it. The project's publishing strategy has not been to maximize the number of publications, but to publish in leading journals. The work has resulted in publications in the top-ranked journals American Economic Review, Review of Economic Studies and Journal of Financial Economics. One paper has been published in the medical journal JAMA Network Open in order to reach out to an audience outside the discipline of economics.
The application also specified sub-projects about crime, entrepreneurship and financial risk taking which have not yet been completed. Importantly, the grant allowed us to acquire the data needed to complete these studies in the future. However, the future for the study about job seeking is more uncertain as we currently believe we do not have enough statistical power to pursue the study.
Briefly about project work process
The project period has been extended due to parental leave. Another change is that the project manager Robert Östling changed workplace from Stockholm University to the Stockholm School of Economics, while co-applicant Erik Lindqvist changed workplace in the reverse direction. The project home institution has thereby changed from Stockholm University to Stockholm School of Economics. Several other researchers have been involved in the project, although they have not been financed through it. The key collaborators are Joseph Briggs (Federal Reserve Board until recently), David Cesarini (NYU) and Matthew Notowidigdo (Northwestern). Joseph Briggs has made several trips to Sweden to work on the studies about stock market participation and financial risk-taking. Sean Lee (Harvard) has worked on the project on financial risk taking, especially during a longer stay during the summer of 2019 which was funded through the project. The study about crime is carried out together with the doctoral student Christofer Schroeder (Stockholm School of Economics) and the study about entrepreneurship with Joacim Tåg (Research Institute of Industrial Economics).
Several of the studies have required more data than we originally anticipated, and some project funds have therefore been reallocated to data acquisition.
Three most important research findings
1. By relating the size of the lottery prize to administrative data on earnings, we estimated how labor supply is affected by an unexpected wealth change (Cesarini, Lindqvist, Notowidigdo & Östling 2017). This provides an estimate of the so-called “income effect”, a key parameter for evaluating tax policy. We estimate fairly small elasticities, which differ relatively little across demographic groups, for example between men and women. We also study the labor supply of the household and we find that lottery winners reduce their labor supply more than their spouse. Although some of the above results were known at the time of our project application, the project funding provided valuable time for interpreting our findings and polishing our manuscript prior to publication.
2. In the study of lottery players' psychological well-being (Lindqvist, Östling & Cesarini 2020), we find that lottery winnings have a long-term and positive effect on life satisfaction. This contrasts with a small but well-known psychological study from the 1970s showing that lottery winners’ well-being did not increase after winning the lottery. Subsequent lottery studies have yielded ambiguous results, perhaps because those studies had lower statistical power than we have.
3. The study of stock market participation (Briggs, Cesarini, Lindqvist & Östling 2020) shows that lottery winners increase their propensity to own stocks, but the effect is smaller than predicted by economic models. Thanks to detailed data, we can investigate various mechanisms and we find evidence that pessimistic beliefs about stock market returns may be a contributing factor why not more lottery winners invest in equity.
New research questions
The main contribution of the project is to provide convincing and precise answers to familiar research questions about the effect of wealth on economic outcomes, but the project has also generated new research questions. For example, the study of stock market participation raises the question how to reconcile our empirical evidence with economic models. We argue pessimistic beliefs might be an important channel, which in turn raises the question how to best model the belief-formation process. Another example is our studies on lottery winners' health. Both our previous study based on registry data (Cesarini, Lindqvist, Östling & Wallace in the Quarterly Journal of Economics 2016) and our survey-based study conducted within this project (Östling, Cesarini & Lindqvist 2020) found small or zero effects on health and health-related behaviors. To what extent is the lack of a substantial effects of wealth on health in our data due to the fact that health care is provided free of charge in Sweden? Would the results have been different in a context where health insurance coverage varies significantly by socio-economic status? One way to address this objection, which we plan to do in a future study, is to study dental health. Because user co-payments are substantial for dental care also in Sweden, the a priori reasons to expect an effect of wealth on access to health care is stronger in this case.
Dissemination of research results
As mentioned at the outset, we have focused on publishing in leading scientific journals, which we believe is important for to reach out with our results as broadly as possible. We have also presented papers at research seminars and scientific conferences both in Sweden and abroad. Our study of lottery winners' life satisfaction has received a great deal of media attention, including in a half-page article in the New York Times (August 24, 2018). We have also given a number of interviews about the same study, for example in Swedish Radio and for the BBC. The study on labor supply has also been summarized by us in a popular scientific article at VoxEU.
Publication list
Briggs, Cesarini, Lindqvist & Östling (2020), “Windfall Gains and Stock Market Participation.” Forthcoming in Journal of Financial Economics.
Lindqvist, Östling & Cesarini (2020), "Long-run Effects of Lottery Wealth on Psychological Well-Being." Forthcoming in Review of Economic Studies.*
Östling, Cesarini & Lindqvist (2020) "Association Between Lottery Prize Size and Self-reported Health Habits in Swedish Lottery Players." JAMA Network Open 3 (3): e1919713.*
Cesarini, Lindqvist, Notowidigdo & Östling (2017) "The Effect of Wealth on Individual and Household Labor Supply: Evidence from Swedish Lotteries." American Economic Review 107 (12) 3917-3946.
Articles marked with an asterisk are published through open access agreements with the publisher. The other studies will be made available on our websites (www.robertostling.com and sites.google.com/site/eriklindqvistsse).
Purpose and development
The purpose of the project was to study how wealth shocks in the form of lottery prizes affect economic behavior. The original project application specified several sub-projects based on administrative register data that differ mainly in the outcome studied, but the application also contained a proviso that part of the project may be devoted to other projects within the same overall research agenda. In line with this proviso, the project time has been partly devoted to conducting a survey of lottery players and analyzing data from it. The project's publishing strategy has not been to maximize the number of publications, but to publish in leading journals. The work has resulted in publications in the top-ranked journals American Economic Review, Review of Economic Studies and Journal of Financial Economics. One paper has been published in the medical journal JAMA Network Open in order to reach out to an audience outside the discipline of economics.
The application also specified sub-projects about crime, entrepreneurship and financial risk taking which have not yet been completed. Importantly, the grant allowed us to acquire the data needed to complete these studies in the future. However, the future for the study about job seeking is more uncertain as we currently believe we do not have enough statistical power to pursue the study.
Briefly about project work process
The project period has been extended due to parental leave. Another change is that the project manager Robert Östling changed workplace from Stockholm University to the Stockholm School of Economics, while co-applicant Erik Lindqvist changed workplace in the reverse direction. The project home institution has thereby changed from Stockholm University to Stockholm School of Economics. Several other researchers have been involved in the project, although they have not been financed through it. The key collaborators are Joseph Briggs (Federal Reserve Board until recently), David Cesarini (NYU) and Matthew Notowidigdo (Northwestern). Joseph Briggs has made several trips to Sweden to work on the studies about stock market participation and financial risk-taking. Sean Lee (Harvard) has worked on the project on financial risk taking, especially during a longer stay during the summer of 2019 which was funded through the project. The study about crime is carried out together with the doctoral student Christofer Schroeder (Stockholm School of Economics) and the study about entrepreneurship with Joacim Tåg (Research Institute of Industrial Economics).
Several of the studies have required more data than we originally anticipated, and some project funds have therefore been reallocated to data acquisition.
Three most important research findings
1. By relating the size of the lottery prize to administrative data on earnings, we estimated how labor supply is affected by an unexpected wealth change (Cesarini, Lindqvist, Notowidigdo & Östling 2017). This provides an estimate of the so-called “income effect”, a key parameter for evaluating tax policy. We estimate fairly small elasticities, which differ relatively little across demographic groups, for example between men and women. We also study the labor supply of the household and we find that lottery winners reduce their labor supply more than their spouse. Although some of the above results were known at the time of our project application, the project funding provided valuable time for interpreting our findings and polishing our manuscript prior to publication.
2. In the study of lottery players' psychological well-being (Lindqvist, Östling & Cesarini 2020), we find that lottery winnings have a long-term and positive effect on life satisfaction. This contrasts with a small but well-known psychological study from the 1970s showing that lottery winners’ well-being did not increase after winning the lottery. Subsequent lottery studies have yielded ambiguous results, perhaps because those studies had lower statistical power than we have.
3. The study of stock market participation (Briggs, Cesarini, Lindqvist & Östling 2020) shows that lottery winners increase their propensity to own stocks, but the effect is smaller than predicted by economic models. Thanks to detailed data, we can investigate various mechanisms and we find evidence that pessimistic beliefs about stock market returns may be a contributing factor why not more lottery winners invest in equity.
New research questions
The main contribution of the project is to provide convincing and precise answers to familiar research questions about the effect of wealth on economic outcomes, but the project has also generated new research questions. For example, the study of stock market participation raises the question how to reconcile our empirical evidence with economic models. We argue pessimistic beliefs might be an important channel, which in turn raises the question how to best model the belief-formation process. Another example is our studies on lottery winners' health. Both our previous study based on registry data (Cesarini, Lindqvist, Östling & Wallace in the Quarterly Journal of Economics 2016) and our survey-based study conducted within this project (Östling, Cesarini & Lindqvist 2020) found small or zero effects on health and health-related behaviors. To what extent is the lack of a substantial effects of wealth on health in our data due to the fact that health care is provided free of charge in Sweden? Would the results have been different in a context where health insurance coverage varies significantly by socio-economic status? One way to address this objection, which we plan to do in a future study, is to study dental health. Because user co-payments are substantial for dental care also in Sweden, the a priori reasons to expect an effect of wealth on access to health care is stronger in this case.
Dissemination of research results
As mentioned at the outset, we have focused on publishing in leading scientific journals, which we believe is important for to reach out with our results as broadly as possible. We have also presented papers at research seminars and scientific conferences both in Sweden and abroad. Our study of lottery winners' life satisfaction has received a great deal of media attention, including in a half-page article in the New York Times (August 24, 2018). We have also given a number of interviews about the same study, for example in Swedish Radio and for the BBC. The study on labor supply has also been summarized by us in a popular scientific article at VoxEU.
Publication list
Briggs, Cesarini, Lindqvist & Östling (2020), “Windfall Gains and Stock Market Participation.” Forthcoming in Journal of Financial Economics.
Lindqvist, Östling & Cesarini (2020), "Long-run Effects of Lottery Wealth on Psychological Well-Being." Forthcoming in Review of Economic Studies.*
Östling, Cesarini & Lindqvist (2020) "Association Between Lottery Prize Size and Self-reported Health Habits in Swedish Lottery Players." JAMA Network Open 3 (3): e1919713.*
Cesarini, Lindqvist, Notowidigdo & Östling (2017) "The Effect of Wealth on Individual and Household Labor Supply: Evidence from Swedish Lotteries." American Economic Review 107 (12) 3917-3946.
Articles marked with an asterisk are published through open access agreements with the publisher. The other studies will be made available on our websites (www.robertostling.com and sites.google.com/site/eriklindqvistsse).