Friday, December 3, 2010

Saving through lotteries

I had blogged earlier about "lottery bonds" that could encourage savings habit among poor people. Such instruments seek to leverage poor people's attraction for lottery schemes to promote savings.

An NBER working paper by Melissa Schettini Kearney, Peter Tufano, Jonathan Guryan, and Erik Hurst explore the potential of Prize Linked Savings (PLS) accounts to incentivize people to save more. PLS accounts pools some of the interest from all depositors and pays out a big lottery prize every month or so. It combines the thrill of the lottery with the safety of a savings account. They write,

"In lieu of paying traditional interest to all investors proportional to their balances, these PLS accounts distribute periodic sizeable payments to some investors using a lottery-like drawing where an investor’s chances of winning are proportional to one’s account balances... This mechanism adds a lottery-like feature to an otherwise standard saving account, creating an asset structure that might hold great appeal to the target low-saver segment of the population."

No comments: