Authors: Katherine Rodgers, Sydney A. Grissom, Lucas Hubbard, and William A. Darity Jr.
Abstract: What happens when individuals receive infusions of money—large or small? This report reviews the evidence around windfalls and other positive income jumps in varying amounts. Many factors affect individual consumption and savings behavior in response to such infusions, such as the framing of payouts, the prior income and wealth levels of the individual or household, and the size, regularity, and expectation of such payouts. Windfalls of a significant size can unlock many opportunities for investment and entrepreneurship. Consumption, following substantial windfalls, generally appears to be restrained. Often, those recipients who experience financial trouble after winning or receiving windfalls were already under extreme financial stress. Reviews of household financial behavior following tax refunds (typically, a relatively small infusion) suggest a spike in consumption. On the other hand, tests of income supplement programs, which distribute payouts that are much smaller than lottery winnings and have less of an effect on individuals’ wealth, indicate no evidence of financial irresponsibility or increased government dependency. Instead, they indicate higher levels of well-being for recipients. Additional tests of such programs and related initiatives could be valuable in helping move all Americans toward a brighter financial future.
Key Findings
- Framing windfalls as “bonuses” (rather than “rebates”) will lead to slightly more spending, and the framing of such payouts as “rebates” can also lead to more popular support for the proposal. There is variance in how individuals change or maintain their behavior in response to these windfalls, but, if all other conditions remain the same, these effects are much smaller for individuals and households at lower income and wealth levels, as liquidity constraints dictate much of the decision-making for these groups.
- Windfalls of a significant size-typically allotted to individuals via lotteries and inheritances-have shown the capacity to unlock opportunities, with many recipients going on to become self-employed, start businesses, or invest in a responsible manner.
- When recipients do fall into financial troubles after winning, it often stems from prior financial strife. Frequently, windfalls help individuals avoid bankruptcy.
- When considering smaller windfalls, tax rebates seem to lead to more consumption, although the degree to which households consume varies based on their income levels and whether or not they expect such a refund. Income supplement programs, which feature payouts that are much smaller than lottery wins, and which have much less of an effect on individuals’ wealth stores, suggest no evidence of financial irresponsibility or greater dependency on government payouts and demonstrate little to no effect on labor market behavior. However, they do indicate higher levels of health and well-being for recipients, a suggestion of the power of these programs.
