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Testing the permanent income hypothesis using the Spanish Christmas Lottery

Author

Listed:
  • Guillermo Cabanillas-Jiménez

Abstract

Purpose - This study aims to investigate the impact of local windfall gains from the Spanish Christmas lottery on household consumption behavior. Design/methodology/approach - The study applies differences-in-differences to assess permanent income hypothesis (PIH) validity, examining pre- and postlottery consumption effects. Additionally, it also uses an instrumental variable regression, using the lottery shock as an instrument for total expenditures, to estimate the Engel curves. Findings - The paper finds a PIH violation; households in winning region notably increase consumption on durable and nondurable goods compared to nonwinning ones. Moreover, durable goods consumption is responsive to lottery winnings, while nondurable goods consumption are unit-elastic to expenditure shocks. Originality/value - To the best of the author’s knowledge, this is the first paper analyzing the effects of winning regions of the Spanish Christmas lottery in all types of consumption goods, testing its consequences in the PIH and estimating its effects in the Engel curves.

Suggested Citation

  • Guillermo Cabanillas-Jiménez, 2024. "Testing the permanent income hypothesis using the Spanish Christmas Lottery," Applied Economic Analysis, Emerald Group Publishing Limited, vol. 32(96), pages 232-259, May.
    • Handle: RePEc:eme:aeapps:aea-07-2023-0276
    DOI: 10.1108/AEA-07-2023-0276
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    More about this item

    Keywords

    Consumption; Durable goods; Nondurable goods; Winning region; Permanent income hypothesis (PIH); C01; C23; C26; C55; C93; D12; D14;
    All these keywords.

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation
    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance

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