Can Gambling Increase Savings? Empirical Evidence on Prize-Linked Savings Accounts

Abstract

This paper studies the adoption and impact of prize-linked savings (PLS) accounts, which offer random, lottery-like payouts to individual account holders in lieu of interest. Using micro-level data from a bank offering these products in South Africa, we show that PLS is attractive to a broad group of individuals, across all age, race, and income levels. Financially constrained individuals and those with no existing deposit accounts are particularly likely to open a PLS account. Participants in the PLS program increase their total savings on average by 1% of annual income, a 38% increase from the mean level of savings. Deposits in PLS do not appear to cannibalize same-bank savings in standard savings products, on average. Instead, PLS serves as a substitute for lottery gambling. Exploiting the random assignment of prizes, we also present evidence that prize winners increase their investment in PLS, sometimes by more than the amount of the prize won, and that large prizes generate a local “buzz” that leads to an 11.6% increase in demand for PLS at a winning branch.

Keywords: household finance, banking, savings, prize-linked savings, lottery

JEL Classification: D14, E21, G21, L83