Testing the Permanent Income Hypothesis using the Spanish Christmas Lottery

The Spanish Christmas Lottery is one of the most common lottery games played in Spain. This paper analyses how local windfall gains from the Christmas Lottery can affect household consumption behavior. We find that there is a significant increase in goods consumption in the winning Regions. More precisely, we find that durable goods are sensitive to lottery winnings, meaning that those households living in the winning Regions of the lottery spend more on this type of goods. Non-durable goods do not seem to react to the income shock, as the estimated effect is inelastic, although the effect is statistically significant. Despite these findings are inline with the theoretical predictions, these results imply a violation of the Permanent Income Hypothesis for long-life goods, as households do not smooth their consumption when a one-time and positive income shock occurs.