Neighbors of lottery winners may be more susceptible to bankruptcy, too

Many lottery winners rue the day they purchased their tickets. That's because they ran into the  well documented curse of landing an unexpected windfall. That sentiment is likely shared by the winner's neighbors, who react to new wealth in the hood by engaging in conspicuous consumption at their own financial peril. 

People who win the lottery are more likely to declare bankruptcy than those who don't, and such pitfalls are also shared by those living nearby, according to a working paper from the Federal Reserve Bank of Philadelphia.

Looking at data from 2004-2014 involving 7,337 lottery prizes from an unidentified Canadian province, economists found a household winning the equivalent of the median annual income tended to increase its neightborhood's bankruptcy rate by 6.6 percent.   

"Our main finding is that the larger the dollar magnitude of a lottery prize of one individual in a very small neighborhood, the more subsequent bankruptcies there will be from other individuals in that neighborhood," wrote Georgetown University's Sumit Agarwal, Vyacheslav Mikhed of the Philly Fed and Barry Scholnick of the University of Alberta.

The researchers found that bankruptcy filings of those with a jackpot winner in the vicinity showed increased spending on the kinds of things all would see, like cars, but not on big-ticket items for inside the home.

Neighbors who filed bankruptcy were also more apt to make high-risk investments and to borrow more than those who didn't live near lottery winners, in line with the view that they were looking to score a big win in the market and be better able to keep pace with their local jackpot winner.