Becoming—and Staying—Rich Requires More than Winning the Lottery

IPR associate Joseph Ferrie examines 182-year-old lottery for economic insights

When thinking about how to address the persistence of poverty, one of the big questions is: How do family traits shape wealth and well-being from one generation to the next?

In two recent working papers, economist and IPR associate Joseph Ferrie is evaluating a 182-year-old experiment, Georgia’s Cherokee Land Lottery of 1832, to analyze how a sudden influx of wealth affects families over time.

Joe Ferrie
Joseph Ferrie

“History is a really convenient laboratory sometimes,” Ferrie noted. “It gives us the ability to observe experiments that we’d never have the capacity to conduct ourselves.”

In the Georgia land lottery, all white males 18 years and older who were state residents three years prior to the 1832 drawing were eligible. Winners received $700 land parcels—or the equivalent of two years of wages for an unskilled laborer in the South.

Why this lottery is more relevant than today’s MegaMillions or Powerball is due to a nearly universal level of participation, or 97 percent of eligible males—the rich and the poor, the educated and the uneducated. Today’s lotteries, however, tend to draw from a few narrow socioeconomic groups, typically poorer Americans. Thus, it becomes difficult to generalize the results of these lotteries to a broader population, Ferrie said.

In the first of two working papers, Ferrie and his co-author, University of Michigan’s Hoyt Bleakley, examine whether parents use their sudden wealth to invest more in their children—more specifically, educating and raising them in ways that pass on human capital traits to enhance their job prospects and labor outcomes.

Using U.S. census records through 1880, the researchers followed lottery entrants, their children, and their grandchildren over nearly five decades. They find that lottery winners had around 3 percent more children than nonwinners, but that winners’ descendants were no more literate, wealthy, or educated than those of nonwinners. The slight increase in the size of winners’ families also disappeared by the third generation. From this, the researchers surmise that family characteristics are more important to intergenerational transmission of wealth and social status than family wealth.

In a second working paper, Ferrie and Bleakley evaluate the lottery winners’ wealth 18 years after their win, again using census data. The two researchers reveal that the lottery’s wealth “shock” actually increased inequality over time—with rich winners becoming even richer and poor winners, poorer.

Ferrie speculates that winning families from poorer backgrounds likely had less savvy money management practices than their richer counterparts.

“Simply dropping very large amounts of money on families that were initially disadvantaged might not have the desired impact of moving them up in socioeconomic status,” Ferrie observed. “It may be necessary to change other aspects of household behavior rather than just the amount of money that’s in the bank.”

Shocking Behavior: Random Wealth in Antebellum Georgia and Human Capital Across Generations” is an IPR and NBER working paper available here. Up from Poverty? The 1832 Cherokee Land Lottery and the Long-Run Distribution of Wealth” is an NBER working paper available here. Ferrie is professor of economics and an IPR associate at Northwestern University. Hoyt Bleakley is associate professor of economics at the University of Michigan.

Photo credit: P. Reese