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Entitlement Spending: Does Unexpected Wealth Make a Difference?

by Elaine Schwartz    •    Oct 17, 2013

Assume for a moment that the leaders of a society want to see what happens when they make people wealthier. Their approach is simple. To random households, they decide to make available the median level of wealth.

At this point, you might be thinking that the situation is unlikely and irrelevant. But it really did happen in the US.

Economists from the University of Chicago and Northwestern discovered a land bonanza that the state of Georgia created in 1832. Having received a massive amount of new land, the state of Georgia organized an acreage lottery in which white males could participate. For a 12.5 cent fee, almost all white male Georgia citizens, 18 years and older who had lived in Georgia for 3 years prior to 1832, could register. The winners would receive a valuable parcel of land that they could keep or easily sell. More than 97% of the state’s eligible males participated and close to 15% won.

The amounts are amazing. Equal to almost $700 in 1850 and more than 2 1/2 years of an unskilled laborer’s wages, the value of the land equaled the median level of wealth in the state. .

Economists thought that by following the households that received the windfall through several generations, they could form conclusions about the impact of a wealth transfer on human capital, poverty and economic growth. More wealth, they hypothesized, could impact school attendance.

Looking at results for 2 subsequent generations, they concluded the wealth transfer did not affect human capital. The authors of the study believe the random character of the lottery let them “disentangle” other variables–called “a family’s genetic and cultural ‘infrastructure'” –from the sole variable of wealth. As they expressed it, “…it does not appear that lottery winners invested more in their children (or that winners’ children invested more in their children).”

Thinking of developing nations, I wonder if the results of the Georgia study relate to Brazil’s conditional cash transfers (CCT). Called Bolsa Familia, the program targets poor families with a small regular electronic money transfer. The support stops though if the children in the household do not attend school for a specified number of days.

Meanwhile, in the US, might the Georgia study relate to the structure of entitlement spending?

Sources and Resources: I do suggest reading more about the Georgia study in the Hoyt Bleakley, Joseph Ferrie paper, “Shocking Behavior: Random Wealth in Antebellum Georgia and Human Capital Across Generations.” In addition, you can hear Dr. Bleakley discuss his study in a Freakonomics podcast while this econlife entry discusses conditional cash transfers in India and Brazil.

 

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