Marginal Propensity to Earn Out of Wealth
RCTReview
Determining how unearned financial wealth impacts individual labor supply is central to designing taxation and welfare policy, yet isolating pure wealth effects from confounding individual traits is empirically challenging. Unearned wealth windfalls test whether individuals substitute work for leisure when lifetime resources unexpectedly increase.
Picture this
Imagine a worker gets a monthly allowance from a magical piggy bank that requires zero effort. Because basic living needs are now covered without working as hard, the worker chooses to trade some work hours for free time, acting like someone who decides to take fewer shifts at a restaurant because monthly rent is permanently paid by someone else.
What the evidence says
Winning a lottery prize reduces annual pre-tax earnings by approximately 1.066% of the prize amount per year (p < 0.001); a 1 million SEK windfall reduces pre-tax earnings by 10,660 SEK per year (5.5% of sample average) and after-tax earnings by 0.576% per year; calibrated dynamic models yield a lifetime marginal propensity to earn (MPE) ranging from -0.17 at age 20 to -0.04 at age 60.
- Who was studied
- N = 247,425 observations across 200,937 unique Swedish lottery players (human adults aged 21 to 64 in Sweden).
- How
- Econometric panel analysis exploiting randomized assignment of monetary lottery prizes within constructed lottery cells, controlling for cell fixed effects and tracking administrative tax records up to 10 years post-win.
What to do
When modeling labor supply responses to lump-sum wealth transfers or tax policies, incorporate an annual pre-tax earnings reduction of approximately 1.1% of total unearned windfall value.
From the source
"Winning a lottery prize modestly reduces earnings, with the reduction being immediate, persistent, and quite similar by age, education, and sex."
f8929526-9215-4a78-95ce-8377460687e7-The Effect of Wealth on Individual and Household Labor Supply- Evidence from Swedish Lotteries..pdf