Testing the Permanent Income Hypothesis using the Spanish Christmas Lottery

Using the earnings from the first prize of the Spanish Christmas Lottery (one of the most popular lottery games in Spain), we study how local windfall gains from the Christmas Lottery can affect household consumption behavior. After estimating the direct impact of the lottery winnings on household consumption for durable and non-durable goods, we find that households living in winning regions significantly increase consumption expenditures on these goods in comparison with non-winning regions. These results imply a violation of the Permanent Income Hypothesis. Using the winning regions to construct a instrumental variable for total household expenditures, we estimate Engel curves and find that the elasticity of consumption of durable goods to total expenditures is greater than one. But, contrary to our expectations, we find that the consumption of non-durable goods is unit-elastic to a shock to total expenditures. These findings are not in line with the prediction of theoretical models of consumption with durable goods (e.g. Cerletti and Pijoan-Mas, 2014), that non-durable goods should be inelastic to income shocks