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.
Authors
Research Fellow University of Oxford
Hamish is the James Meade Professor of Economics at the University of Oxford, a Professorial Fellow of Nuffield College and a Research Fellow at IFS.
Research Associate University of Bristol
Sarah is a Research Associate at the IFS and Head of the Department of Economics at the University of Bristol with interest in applied microeconomics.
Research Fellow University of Michigan
Tom is a Research Fellow at IFS, a Research Professor for the Institute for Social Research at the University of Michigan.
Journal article details
- DOI
- 10.1016/j.jebo.2016.07.023
- Publisher
- Elsevier
- JEL
- E21,D12,D81,L83,C18
- Issue
- Volume 131, November 2016
Suggested citation
T, Crossley and H, Low and S, Smith. (2016). 'Do consumers gamble to convexify?' 131(2016)
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