The Impact of Lottery Prizes on Household Welfare


Lottery is a game in which people purchase tickets for a chance to win a prize based on the drawing of lots. The first documented lotteries were held in the Low Countries in the fifteenth century, to raise funds for town fortifications and other public purposes. The drawing of lots to determine ownership or other rights is recorded in ancient documents, including the Bible. The lottery emerged as a popular form of gambling in the modern sense of the word after 1612, when King James I of England created one to finance his colony in Virginia. In the seventeenth and eighteenth centuries, state-sponsored lotteries became a common way to raise money for town and country services and wars.

By the nineteenth century, state governments were faced with a growing number of public expenditures that exceeded their available revenue. This confluence of demographic and economic trends made it increasingly difficult to balance state budgets without either raising taxes or cutting government services. Advocates of legalized lotteries argued that these games could provide the revenues states needed without burdening average citizens with higher taxes. But the evidence quickly put the lie to this claim. The initial lottery proceeds, which were hoped to total hundreds of millions of dollars, fell far short of expectations.

The first thing that needs to be considered is the cost of organizing and promoting the lottery. This is usually a substantial share of the overall prize pool, and must be deducted from the amount available for the winners. This leaves a sum that may be awarded as a single lump sum or as a series of smaller payments over time. Some lotteries offer both types of prizes.

A second thing to consider is the number of tickets sold and the cost per ticket. A third thing to consider is the likelihood of winning. Lotteries may offer multiple prize levels, with the top prizes being much larger than those offered in lower-level prize categories. Lottery tickets may also be sold in fractions, which are grouped together for marketing purposes and often cost less than the full ticket. Computers are commonly used to determine the winners, though they have not entirely replaced human involvement in this process.

In order to assess the impact of lottery prizes on household welfare, researchers need a good understanding of how people respond to windfalls. This requires a large sample of households, and an ability to track their financial and life satisfaction before and after the lottery.

Using data from the German Socio-Economic Panel (SOEP), a nationally representative survey of 15,000 households, researchers have tracked lottery winners over time. They have also surveyed them on a variety of other subjects, including their overall financial and life satisfaction and their decision-making processes. This research has revealed some interesting patterns in lottery winner behavior. Among the most surprising is that lottery winners tend to be poorer and have less financial sophistication than their non-winning counterparts. As a result, they have a tendency to spend their winnings, rather than putting them toward debt repayment or savings.