Do the Spanish Christmas Lottery prizes boost entrepreneurship?

The Spanish Christmas lottery is a national event watched by millions every year. ‘El Gordo’, or ‘The Big One’, is televised live on 22 December, with a choir of children singing the numbers as they’re announced. 

Unlike most lotteries, which sell unlimited individual tickets with numbers either chosen by the player or allocated at random, in the Lotería Nacional multiple tickets share the same number and are often sold by the same official vendor. 

The Lotería Nacional offers a real-world setting to examine the impact of unconditional cash transfers

As a result, the winning tickets with the largest prizes create an immediate windfall concentrated in one small area — and offer a real-world setting to examine the impact of unconditional cash transfers in specific regions. 

Esade’s Assistant Professor Vicente J. Bermejo, with Miguel A. Ferreira (Universidade Nova de Lisboa), Daniel Wolfenzon (Columbia University and NBER) and Rafael Zambrana (University of Notre Dame) studied evidence from lottery winners to examine how these cash windfalls affect entrepreneurship. 

The research, published in the Journal of Financial and Quantitative Analysis, reveals that the real winner is the local economy. 

The numbers game

All Lotería Nacional tickets feature one of 100,000 five-digit numbers. Each of these five-digit numbers is divided into 160 series, with each series divided again into 10 to create 1600 individual tickets, costing €200.  

However, one “ticket” is actually a strip of 10, which can in turn be sold individually for €20. One five-digit number could be shared between 1,600 to 16,000 ticket holders, and all holders of a ticket with the winning five-digit number will take a share of the total prize pot for that ticket.  

This can range from the top prize of €4 million to the lowest prize of €200. As tickets are sold by official vendors who are allocated a series of tickets, the winners are normally concentrated in one small area. This offers a unique setting to explore the impact of cash windfalls on the establishment and growth of small businesses and local job creation. 

A perfectly formed randomized trial 

Economic conditions play an obvious role in small business success, but the wide number of factors at play and the difficulty in obtaining private data of small firms hinders research efforts to prove a causal relationship with entrepreneurial activity. 

The Spanish Christmas lottery offers an opportunity to overcome these barriers to research in several ways. As well as the largest prizes delivering a significant windfall concentrated in one area, the conditions of play offer a naturally randomized control trial setting to examine the impact of this cash boost.  

Job and business creation increase significantly in winning areas

The lottery is played on the same day every year, so the effects of this windfall — which can be worth up to six percent of the area’s gross domestic product — are not contingent on any external economic or policy conditions. 

And around 75 percent of the Spanish population participates in the lottery, providing the researchers with a wide sample of ordinary citizens as opposed to habitual gamblers or seasoned entrepreneurs.  

A gift to the economy

The research, which covers the period from 1994 to 2016 for each of Spain’s 50 provinces, examined the financial information of over 2.5 million public and private Spanish firms.  

By comparing new firms created in the same year in non-winning provinces, they found that lottery prizes have “a positive and significant effect” on entrepreneurial activity, with job and business creation increasing significantly in winning areas.  

For every prize of €1000 per person, firm entry increased by 0.29 percentage points and job creation by startups increased by 3.3 percentage points. For increases in disposable income of €3760 per person, 271 new firms would be created per province, per year — around 13 percent of the average annual number. The same cash boost would lead to 1000 new jobs — an annual increase of 16 percent. Overall, the firms created in winning provinces were larger, paid higher wages, were more profitable and survived longer.  

Business as usual

For established businesses, lottery winnings had no impact on profitability, growth or job creation. The researchers attribute this to the relatively low level of prize money.  

Where a modest cash prize could facilitate entry to market for a startup, its impact would not be significant on potential investment opportunities for incumbent businesses. However, the job market competition created by the startups in the area did lead to an overall increase in wages. 

The lottery prizes created a positive effect on self-employment, particularly in the services sector and manufacturing. And, as the labor market was enhanced by startups, the risk of moving into self-employment was seen as being reduced by the safety net of returning to an employed role. 

The potential benefits of unconditional cash transfers have been examined extensively by economists. The research from Bermejo and co-authors highlights the long-term positive impact they can and do have on the creation of new businesses and jobs — particularly in regions with limited access to credit.