For indi­vid­u­als and fam­i­lies fac­ing finan­cial ruin one would assume that a lot­tery win would be a per­fect, if lucky, way out of hard­ship. Con­trary to this, how­ever, an analy­sis of a small, unique set of people—Floridian lot­tery win­ners linked to bank­ruptcy records—finds that lot­tery win­ners are more likely to claim bank­ruptcy than oth­ers who were in a sim­i­lar finan­cial state pre­vi­ous to their win (pdf).

A fun­da­men­tal ques­tion faced by pol­i­cy­mak­ers is how best to help indi­vid­u­als who are in finan­cial trou­ble. This paper exam­ines the con­se­quences of the most basic approach: giv­ing peo­ple large cash trans­fers. To deter­mine whether this pre­vents or merely post­pones bank­ruptcy, we exploit a unique dataset of Florida Lot­tery win­ners linked to bank­ruptcy records. Results show that although recip­i­ents of $50,000 to $150,000 are 50 per­cent less likely to file for bank­ruptcy in the two years after win­ning rel­a­tive to small win­ners, they are equally more likely to file three to five years after­ward. Fur­ther­more, bank­ruptcy fil­ings indi­cate that even though the median win­ner of a large cash prize could have paid off all of his unse­cured debt or increased equity in new or exist­ing assets, she chose not to do either. Con­se­quently, although we can­not be sure other recip­i­ents of finan­cial assis­tance would react in the same way lot­tery play­ers did, our results do sug­gest that some skep­ti­cism regard­ing the long-term effect of cash trans­fers may be warranted.

via The Under­cover Economist