Do lottery payments induce savings behavior? Evidence from the lab

•A laboratory experiment investigates whether Prize Linked Savings induce savings.•We find PLS leads to greater savings than straightforward interest of the same expected value.•PLS is preferred most by men, self-reported lottery players, and subjects with low bank account balances.•We structurally estimate parameters governing time and risk preference, and probability weighting.

This paper presents the results of a laboratory experiment designed to investigate whether the option of a Prize Linked Savings (PLS) product alters the likelihood that subjects choose to delay payment. By comparing PLS and standard savings products in a controlled way, we find strong evidence that a PLS payment option leads to greater rates of payment deferral than does a straightforward interest payment option of the same expected value. The appeal of the PLS option is strongest among men and self-reported lottery players. We use the results of our experiment to structurally estimate the parameters of the decision problem governing time preference, risk aversion, and probability weighting. We employ the parameter estimates in a series of policy simulations that compare the relative effectiveness of PLS products as compared to standard savings products.