Consumers in other countries have the choice to use Prize Linked Savings accounts that combine aspects of a lottery with a traditional bank account or savings bonds, but American laws restrict such choices for consumers here, according to a new working paper from the National Bureau of Economic Research.
The paper, "Making Savers Winners: An Overview of Prize-Linked Savings Products," is by the University of Maryland's Melissa Schettini Kearney, Northwestern University's Jonathan Guryan, Harvard Business School's Peter Tufano, and the University of Chicago's Erik Hurst.
They write, "there are currently significant legal and regulatory obstacles to PLS accounts in the U.S. Yet in places without such restrictions, prize-linked savings accounts have been both widespread and quite popular."
The authors trace the history of such programs all the way back to 1694, when Great Britain offered a "Million Adventure" to pay for the Nine Years' War. Latin American banks have offered such programs since the 1990s, and German and Japanese banks also offer them. The government of the United Kingdom offers "Premium Bonds" that offer, instead of interest, a chance at a tax-free prize. In South Africa, First National Bank offered the Million-a-Month Account, "a no-fee savings account which paid a nominal interest rate (0.25 percent) and rewarded savers with one prize entry for every 100 rand invested." The accounts were popular, but the South African Lottery Board "sued to have the program shut down as an illegal lottery."
The paper cautions that in America, "state lottery laws prohibit private lotteries, in part to enable states to maintain a monopoly over these activities."
The authors don't take a position on whether America should change its laws to allow such accounts, saying that more research is necessary on whether the accounts "would generate new savers and new saving, and if so by whom."
Disclosure: Professor Tufano and I both serve on the Harvard Crimson's graduate council.