Stock Loan Lotteries and Individual Investor Welfare

Abstract

PurposeThis paper proposes and models stock loan lotteries, a financial innovation that improves individual investor welfare. Stock loan lotteries are prize-linked payoffs using securities lending fees.Design/methodology/approachThis paper solves an existing theoretical model for an investor's utility-maximizing choices with and without stock loan lotteries and compares outcomes.FindingsStock loan lotteries motivate prospect theory investors to buy and hold risky assets with high expected returns. Stock loan lotteries improve welfare more for poor investors and improve welfare more in a model with market frictions such as trading costs.Social implicationsStock loan lotteries increase household savings, leading to greater financial wealth and security in retirement.Originality/valueThis paper proposes a new financial product that improves financial outcomes for individual investors.