How the payoff decisions of lottery winners have shifted the income distribution

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When I posted the photo of people lining up for Powerball Mega Millions tickets in New York, I did it mainly out of guilt that I hadn’t posted anything yet today. But I learned a few minutes later, from Joel Slemrod of the University of Michigan, that it was highly relevant.

The relevance is that lottery winners have been increasingly choosing the lump-sum distribution over the 20-year payout. “There’s been a secular change in how people take these things,” Slemrod said. “And that’s having an effect on the apparent income distribution.”

It’s not just lottery winnings. Stock option exercises are often concentrated into a particular year. Employees taking buyouts often opt for a lump-sum pension payment, etc. In these cases it’s not so much that income distribution is becoming more unequal between people as that it’s becoming more unequal from year to year for a particular individual. It’s sort of the flip side of the high-earners have more volatile incomes argument I made yesterday.

Slemrod is no Alan Reynolds–he doesn’t think the lump-sum phenomenon explains all or even most of the apparent rise in income inequality over the past quarter century. “But I do believe that’s part of what’s going on,” he said. I’ll buy that. Heck, I’ll buy lots of things after I get that lump-sum Powerball Mega Millions jackpot.

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