The finances of low income households
Recent news has drawn attention to a likely increase in the use of payday loans – short-term loans at staggeringly high rates of interest – to cover temporary income shortfalls, giving an insight into how low income households manage their finances during the economic downturn.
Another possibility – discussed in a recent paper – is that low-income households might buy a National Lottery ticket. Rather than being irrational, as is usually thought, this might actually be a reasonable choice for people who are faced with “lumpy” spending needs – such as replacing a consumer durable or paying off debts – and who have no savings and no access to credit on reasonable terms.
The basic argument is that a Lottery ticket gives someone the opportunity to forego a small amount of nondurable spending for the chance of a sizeable lump sum that could make them a lot better off – for example by allowing them to buy a replacement washing machine or television.
Is this what people actually do? Well, perhaps it is no coincidence that the National Lottery operator Camelot recently announced its “highest-ever interim” lottery sales.
Rather than looking at Lottery sales, however, the paper looks at the question in a different way and asks whether sales of durable goods are more responsive to Lottery wins than to similar-sized cash windfalls from other sources – which would be consistent with people buying Lottery tickets as a way of financing durable goods. To take care of general differences in the effect of Lottery winnings (such as feeling lucky), the research compares the difference in response across two types of people – those who should otherwise be able to draw on savings and/or other forms of credit and those who cannot.
The findings provide quite a bit of support for the argument that at least some people might use the Lottery as a way of financing lumpy spending. Focusing on windfalls of between £200 and £5,000, purchases of consumer durables (fridges, washing machines, televisions etc) are shown to be significantly more responsive more to a Lottery win than to other types of windfall – and only for those who would otherwise have few alternative options. This is precisely what you would expect to find if the Lottery was being used to finance such purchases (and it is hard to think of another explanation for this result).
So, while the current economic downturn may bring bad news for most, it may well continue to be a good time for Camelot.