The Neighbour Effect: When Someone on Your Street Wins, Your Bankruptcy Risk Rises

Most research on lottery winners studies the winner. One study asked a stranger question: what happens to the people who live near them?

The answer is uncomfortable, and it is one of the cleanest demonstrations of conspicuous consumption in economics.

The study

Sumit Agarwal, Vyacheslav Mikhed and Barry Scholnick, Peers' Income and Financial Distress: Evidence from Lottery Winners and Neighboring Bankruptcies — circulated as Federal Reserve Bank of Philadelphia Working Paper 18-22 and subsequently published in the peer-reviewed literature.

The design uses administrative data from a Canadian province, linking lottery wins to the subsequent borrowing and bankruptcy filings of people living in the same small neighbourhoods. Because the size of a lottery win is random, the authors can ask whether a bigger win next door causes bigger effects — a genuine causal design rather than a correlation.

The finding

For every $1,000 increase in a neighbour's lottery prize, bankruptcy filings among the winner's neighbours rose by about 2.4% over the following few years.

The effects were stronger in low-income neighbourhoods and in areas with high income inequality — the places where the gap opened by a windfall is most visible and most keenly felt.

The mechanism, and how they proved it

The obvious explanation is "keeping up with the Joneses": people who feel poorer relative to their neighbours borrow to spend more.

What makes this study convincing is that the authors could test that mechanism rather than assert it. They examined what the bankrupt neighbours had been buying, and found increased spending on visible goods — cars being the clearest example — but not on big-ticket items that stay inside the house, which nobody else sees.

That asymmetry is the fingerprint of status-driven consumption. If neighbours were simply spending more because of a general mood or a local economic shock, interior purchases would rise too. They did not. The spending went specifically to the things that can be observed from the street.

Why this matters beyond lotteries

Lottery wins are one of the few genuinely random increases in one person's income, which is exactly what you need to study relative-income effects cleanly. The result generalises well beyond lotteries: it is evidence that relative income affects financial behaviour, not just absolute income. Someone whose own circumstances are unchanged makes worse financial decisions because a neighbour's circumstances improved.

That has real implications for how we think about inequality, and it arrives from an unusually clean experiment.

What it adds to the winner literature

Put the four main findings side by side and a coherent picture emerges:

The winner tends to do fine. The measurable financial damage shows up next door — which is precisely the opposite of the curse folklore, where the winner is destroyed and everyone else is a bystander.

The practical implication

For a winner, this is a concrete argument for discretion. Where your jurisdiction permits anonymity, it protects more than your privacy — visible windfalls impose measurable costs on the people around you. Which countries allow it is set out in claiming anonymously by country, and the trade-offs in anonymous vs public winners.

For everyone else, the finding is a useful piece of self-knowledge: the impulse to match a neighbour's visible spending is well documented, financed by debt, and has been measured ending in bankruptcy court. See also why we overestimate our chance of winning and loss aversion and the sunk-cost trap.