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Prize-linked savings games: Theory and experiment

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  • Jindapon, Paan
  • Sujarittanonta, Pacharasut
  • Viriyavipart, Ajalavat

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.

Suggested Citation

  • Jindapon, Paan & Sujarittanonta, Pacharasut & Viriyavipart, Ajalavat, 2022. "Prize-linked savings games: Theory and experiment," Games and Economic Behavior, Elsevier, vol. 133(C), pages 202-229.
    • Handle: RePEc:eee:gamebe:v:133:y:2022:i:c:p:202-229
    DOI: 10.1016/j.geb.2022.02.005
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    More about this item

    Keywords

    Prize-linked savings; Lotteries; Savings; Expected utility theory; Contests; Experiments;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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