The Ticket to Easy Street?

by Amy Wolf Paige Skiba

In a tough economy, lottery tickets may seem like an enticing way to solve financial problems. But new research by a team of economists that includes Assistant Professor of Law Paige Skiba found that people who won large cash prizes of between $50,000 and $150,000 and later declared bankruptcy did not use their winnings to resolve their debt or other financial problems.

Professor Skiba and two co-authors, Scott Hankins of the University of Kentucky and Mark Hoekstra of the University of Pittsburgh, studied a group of 35,000 individuals who won lottery prizes of $600 or more. They found that winners of mid-level prizes of between $50,000 and $150,000 who later filed for bankruptcy had not used their winnings to pay off their debt or increase their equity in new or existing assets. While these mid-level lottery winners were 50 percent less likely than small winners who won less than $10,000 to file for bankruptcy within two years after winning their prize, their rates of filing for bankruptcy went up by 50 percent three to five years after their win.

"Winning the lottery seemed to do little to help these lottery winners ease their debt," said Skiba. "Our results are consistent with some winners using their prize to take additional risks or buy expensive luxury goods. Others seemed to simply lack the knowledge to handle large amounts of money wisely."

Skiba, Hankins and Hoekstra also looked at their findings to shed some light on what might occur if lawmakers gave people large sums of money to ease their financial burdens. The researchers found that some individuals who received sufficiently large cash prizes to pay off all of their unsecured debt only postponed, rather than avoiding, bankruptcy. "While we cannot be sure that homeowners or other beneficiaries of government aid would respond in the same way our group of lottery winners did, the results may warrant some skepticism about the long-term efficacy of bailouts," said Skiba.

The three researchers used data from Florida's Fantasy 5 lottery game from April 1993 through November 2002. They examined all winners who won more than $600. If someone won the lottery more than once, the researchers only looked at the person's first win. Of the 35,000 Fantasy 5 winners who won prizes of between $600 and $150,000 during that time, almost 2,000 were linked to a bankruptcy filing within five years after winning. In addition to finding that greater winnings only postponed bankruptcy for winners of larger prizes, Skiba says, "We also found there was no difference in the net assets or unsecured debt between large and small winners. We think our findings suggest that policymakers may want to think twice before giving money to people who are heavily indebted as a quick fix for their financial problems."

Skiba said that the act of filing for bankruptcy is important for several reasons. "Filing for bankruptcy is arguably the most extreme signal of financial distress," she explained. "Not only is it bad for creditors, but it also seriously harms a filer's credit score, and reduces the availability and increases the price of future loans."

Skiba and her co-authors presented their research at the National Bureau of Economic Research Law and Economics Summer Institute last summer.

The researchers note that lottery players are much more representative of the population than some might think. Research conducted in 1999 by the team of Clotflelter, Cook, Edell and Moore ("State Lotteries at the Turn of the Century: Report to the National Gambling Impact Study Commission") showed that more than half of American adults had played a state lottery in the past year.

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