Household Responses to Phantom Riches

Abstract

with Samuli Knüpfer, Ville Rantala, and Petra Vokata

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.