Household Responses to Phantom Riches

Abstract

We study the consequences of investment fraud victimization using unique administrative data on Ponzi scheme investors. A matched control event-study design shows that the victims experience a 6% annual labor income loss. Income first declines when an investor joins the scheme, consistent with distorted beliefs lowering labor supply. The scheme’s collapse triggers a further decrease, which we attribute to financial stress. Investors also face higher indebtedness and tilt their portfolios away from delegated investments. The income loss persists in the long run, equals twice 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