The Causal Effect of Income is (Often) Zero

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The Causal Effect of Income is (Often) Zero<br>Evidence on the effect of income on health, education, crime, and child outcomes from lotteries and RCTs

Maxwell Tabarrok<br>May 19, 2026

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Poverty is associated with a litany of negative outcomes in addition to the direct effects of material deprivation. For example: low educational attainment, high crime, poor health, food insecurity, high stress, homelessness, and more.<br>If this bundle of associated harms is the causal result of poverty, then the case for poverty-relieving transfers is bolstered. Not only do you get to transfer resources to higher-marginal-utility consumers, you also get to solve this long list of other social ills.<br>But the correlation between poverty and these outcomes is not sufficient to prove a causal link. It may be that a common ancestor causes both poverty and the associated “poverty bundle” or that causality goes the other way around.<br>Luckily, these kinds of income-raising transfers are among the most well-studied policies in economics. In his Public Economics lectures this semester, Raj Chetty introduced several extremely well-identified studies that separate the causal effect of income from its observed associations, which I cover below alongside several other studies from my own literature search.<br>All of these studies find that extra income increases consumption and leisure. So there’s no doubt that transfers relax budget constraints and make recipients better off. The question is: do they also solve the broader poverty bundle?

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Wealth, Health, and Child Development

David Cesarini, Erik Lindqvist, Robert Östling, and Björn Wallace’s QJE paper answers this question using lottery players in Sweden.<br>There are two big advantages to the setting of their paper. First, Nordic administrative data contains extremely detailed, birth-to-death information on nearly all residents over multiple decades including data on physical and mental health, income, and intergenerational connections between parents and children. This gives the researchers a decades-long panel with nearly no attrition and enough detail to test the effect of income/wealth on dozens of important outcomes.<br>Second, Swedish lotteries have an extremely broad base of participation, in contrast to the highly selected group of lottery players in the US. Much of the sample comes from Prize-Linked Savings accounts, which offer lottery entries to bank account holders in place of interest, and around half of all Swedes hold such an account. Thus, the sample of lottery players barely differs from the general Swedish population in baseline health, income, education, fertility, or marriage.<br>So what are their results? First, on health. If you just naively correlate wealth with mortality, it looks like increasing wealth by 1 million SEK (about $140,000) decreases 10-year mortality by 2.8%, a big effect! Even after controlling for a broad array of baseline controls (like race, gender, education, etc) increasing wealth by $140,000 is still associated with around a 2% drop in 10-year mortality, both in the US and in Sweden. But these are just correlations and even after controlling for baseline demographics, there are non-random selection effects determining who ends up in the higher income brackets.<br>When we look at the effect of extra wealth on randomly selected lottery winners, the effects shrink to zero. The smaller points moving downwards on the graph below show the correlational effect of an extra 1 million SEK on 10-year mortality: The richer cohort is 2% less likely to die in 10-years. The larger, square points centered around the dotted line show the causal effect of wealth on mortality, which are always statistically indistinguishable from zero. If anything, the randomly selected lottery winners are slightly more likely to die within 10-years compared to similar lottery players who happened not to win.

The causal effect of wealth on mortality is zero. That means that if you took someone from the poorer cohort, who is 2% more likely to die than someone with $140k in extra cash and you gave them $140,000, they would still be 2% more likely to die than the people who started with that money.<br>Put another way, the reason that richer people live longer is not because of what they can afford. It’s not because of better health care, private doctors, fancy food, safer cars, bigger houses, or longer vacations. If it was, then the people who win the money could buy those things too and get all the same benefits.1<br>This result cuts against most of the popular and academic theories for why the correlation between wealth and mortality exists. In particular, it discredits theories which put the ability of the rich to afford healthcare front-and-center in their explanations for why the rich live longer. It’s not true that poor people would have the same health outcomes as rich people if only they...