Tuesday, April 21, 2009

How much would winning the lottery affect your labor supply?

Winning the lottery can provide a big boost to your unearned income. From what we've discussed in class, we know increasing unearned income shifts out your budget constraint and should prompt reductions in work via income effects.

But how big are these effects? Are income effects big or small? Would you change how much you work if given $15,000 a year for 20 years? What about $80,000 a year for 20 years?

The beauty of the lottery is that winning is random, so we can actually investigate the magnitude of these effects given appropriate data. Guido W. Imbens, Donald B. Rubin, and Bruce Sacerdote performed such an analysis using a data from a survey of 496 Massachusetts lottery winners. They found:
winning $15,000 a year for 20 years would not have a major effect on your life. However, if you instead won $80,000 a year for 20 years, it would affect your labor force participation, automobile expenditures, the value of the home you own, and your savings, according to the study.

Imbens, Rubin, and Sacerdote, in Working Paper 7001 from the National Bureau of Economic Research, analyzed a survey that they conducted of 496 Massachusetts lottery winners. The survey participants were divided into three groups: winners of one-time prizes between $100 and $5,000; winners of a yearly amount of less than $25,000 for 20 years, with an average annual prize of $15,000; and winners of at least $25,000 a year for 20 years with an average prize of $80,000 annually.

The researchers found that a prize of $15,000 a year had little effect on the labor supply of the winners. However, they also found that winning $80,000 rather than $15,000 reduced labor supply significantly. Additionally, estimates by Imbens, Rubin, and Sacerdote indicated that, in this case, car values rose (by at least $5,500 on average), home values increased (by $30,000 on average), and savings went up (especially in the form of bonds and mutual funds).

To analyze the true effects of winning the lottery, I do agree that yearly cash amount does matter. Yet, if I were to win $80,000 for the next 20 years, in the actual labor market would decrease. Now with to much time on my hands, I would donate time to non-profit charities. Thus, increasing social welfare that us economist care so much about!
Yearly cash amount matters significantly. After winning $80,000 for the next 20 years I wouldn't work at a normal 9 to 5 job. I would invest in couple homes and collect rent. With the extra time I would maximize my utility by traveling to places I haven't been.
Yearly cash amounts do matter. Recieving $80,0000 for the next 20years would affect my life significantly. I would spend my time investing and traveling,and in turn I would contribute to the lowering of the labor force.
This data does not surprise me very much, in a general sense, and I am sure the people conducting this research took into account the kinds of life styles that people had previous to the lottery winnings. I think it would be quite obvious that if someone already had an abundance of money, even the 80,000 dollar amount of money a year would cause little change in that person’s life style, but if someone came from poverty or even the middle class this kind of winning would most likely alter that persons financial and labor decisions greatly. This article is obviously not the complete study, but I hope that they took into account what kind of people are participating in the lottery, usually from the lower or middle class, so this amount of money would more drastically change their life styles.
The effect that the different values of winnings seems to greatly depend on the cost of living for individuals. $15,000 per year is not enough money to comfortably live off of, while $80,000 seems as though it would be more than enough. No surprise here about the drastic different labor supply results for the different lottery winners.
This is a pretty interesting study. It seems to make sense that the average annual prize of $80k is when the effects on labor supply really begin to take place. Although a $15K prize is certainly something everyone would sure love to get annually, when you think about it, you could see how this would not be quite enough for someone to decrease their labor supply. Although the study is best to be random, it would be interesting to see the incomes of some of these samples. Obviously, a $15,000 a year prize means something completely different to someone that makes $35K a year as opposed to someone making $100K. It would be interesting to see what lottery prize, as a percentage of someone’s income, it would take in order to effect their labor supply and other aspects of their life.
The amount that winner gets from the lottery can decide whether they work or not. It's common sense. If they can live with that amount without any suffering with money in any situation, winner is never going to work for their living. They would work for their satisfaction or fun.It is not really work but leisure. The amount is pretty huge to explain about income and substitute effect. It is very clear with common sense.
I am not really surprised by this data since the more one wins the more their life changes. 15,000 a year extra would be nice but it is not a sufficient amount to drastically change anyones life since one cannot live off of that amount. On the other hand if someone was to win 80,000 that is enough to live off of so this would make the person work less. If I were to win either of the amounts my lifestyle would not change. I would still work the same amount but if I was working a job I didn't enjoy I would probable find a job that I liked more even if the salary was less. All in all winning any amount of money would be nice but for me it wouldn't change my life. I am perfectly content with the things I have in my life.
This data is not surprising to me, most of people change their life if they won $80,000 for the next 20 years. I also agree with not to change my life if I won $15,000 for the next 20 years. However, in my opinion, if I were to win $80,000, I would not quit my job because I think $80,000 is not sufficient if I have a family. Of course, I might spend some money to invest or savings but I just want to keep working as ordinary. I used to calculate my future value when I will start to work. I needed at least $100,000 if I have a child and live in urban city.
I think if I received $80,00 a year I would have to work, I would be so bored with myself that I would go crazy sometimes because I would feel that I am not doing anything beneficial to myself at all. I would rather retire at 40, but work for the next 17 years or so. I think the feeling you get from accomplishing something by working hard is hard to find. And it feels good when you do. I would rather make 80,000 to go along with the 80,000 in lottery winnings. you can do a lot more with 160,000 than you can with 80,000
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