Abstract
We introduce a game in which each player can allocate her endowment in a prize-linked savings (PLS) account, which awards a fixed prize only to a randomly chosen winner. Like Tullock's contest, the probability for each player of winning the prize is the ratio of her PLS deposit to the total deposits made by all participating players. We derive a unique equilibrium and further examine the effects of introducing PLS as an alternative savings option to standard savings (SS), which yields a fixed rate of return. Both theory and experiment agree that introducing PLS lowers each participant's SS amount. While the theory suggests that the effect of introducing PLS on total savings (SS+PLS) is ambiguous, we find in the laboratory that the effect is positive and significant. By varying the PLS prize and group size, both PLS and total savings increase as the average PLS prize per subject increases.
Highlights
A low savings rate has long been a concern among economists
By assuming that all players are expected utility maximizers with concave constant absolute risk aversion (CARA) utility functions, we prove that there exists a unique Nash equilibrium even with heterogeneous degrees of risk aversion
We develop a game-theoretic model of portfolio allocation decisions, where traditional savings (TS) and prize-linked savings (PLS) are available, and experimentally examine the effectiveness of PLS in the laboratory
Summary
A low savings rate has long been a concern among economists. Recent changes in socioeconomic factors, such as fluid labor markets, modest long-run financial returns, and hyper-longevity, call for new retirement-savings schemes for today’s younger workers. Some do not return all of the principal, so the ex post rate of return for nonwinners is negative.6 Another variation of PLS is a marketing campaign that provides a chance of winning a prize to new customers or to existing customers who increase their balance.. While saving at the lowest rate, subjects who prefer PLS display the greatest increase in total savings and the highest ratio of PLS deposit to total savings These findings are consistent with previous studies, despite strategic interaction in our design.. Dizon and Lybbert (2017) adopt Atalay et al (2014)’s setting, but replace PLS with lottolinked savings (LLS) in a lab-in-field experiment in Port-au-Prince, Haiti Their LLS account may not preserve the entire principal but guarantees a minimum return ranging from 60%– 100%.10.
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