Household Responses to Phantom Riches
Fisher College of Business Working Paper No. 2021-03-008
Charles A. Dice Center Working Paper No. 2021-08
91 Pages Posted: 24 May 2021 Last revised: 3 Jul 2023
Date Written: July 3, 2023
Abstract
We study household responses to "phantom riches"—the illusion of attaining substantial wealth—by using administrative data on Ponzi scheme investors. An event-study design exploiting staggered entry shows investors experience a 6 percent labor income loss. Income first declines when an investor joins the scheme, consistent with distorted beliefs lowering labor supply. The scheme’s collapse evokes a further decrease, which we attribute to financial stress caused by the collapse. Investors also face higher unemployment and indebtedness and shy away from delegated investments. The long-run income loss twice exceeds the direct investment loss and substantially adds to the social cost of fraud.
Keywords: Investment fraud, distorted beliefs, financial stress, consumer financial protection, Ponzi scheme
JEL Classification: G11, G40, G51, J22
Suggested Citation: Suggested Citation