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Prize-linked savings games: Theory and experiment

Paan Jindapon (), Pacharasut Sujarittanonta and Ajalavat Viriyavipart ()

Games and Economic Behavior, 2022, vol. 133, issue C, 202-229

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.

Keywords: Prize-linked savings; Lotteries; Savings; Expected utility theory; Contests; Experiments (search for similar items in EconPapers)
JEL-codes: C72 C91 D12 D14 E21 G11 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1016/j.geb.2022.02.005

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