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Do consumers gamble to convexify?

Published version
Peer-reviewed

Change log

Authors

Crossley, TF 
Smith, S 

Abstract

The combination of credit constraints and indivisible consumption goods may induce some risk-averse individuals to gamble to have a chance of crossing a purchasing threshold. This idea has been demonstrated theoretically, but not explored empirically. We test this idea by focusing on a key implication: income effects for individuals who choose to gamble are likely to be larger than for the general population. Using UK data on gambling wins, other windfalls and durable goods purchases, we show that winners display higher income effects than non-winners but only amongst those likely to be credit-constrained. This is consistent with credit-constrained, risk-averse agents gambling to convexify their budget set.

Description

Keywords

Lotteries, Income effects, Consumption, Durables, External validity

Journal Title

Journal of Economic Behavior and Organization

Conference Name

Journal ISSN

0167-2681
1879-1751

Volume Title

131

Publisher

Elsevier BV
Sponsorship
This work was supported in part by the ESRC-funded Centre for Microeconomic Analysis of Public Policy at the Institute for Fiscal Studies (grant number RES-544-28-5001.)