Prospect theory and the potential for lottery-based subsidies

Abstract

The relevant literature notes a lack of applications relative to the theoretical impact of prospect theory. In this paper, I provide a brief review of this literature aimed at policymakers before developing an idea for lottery-based government subsidy policies. I consider the general conditions under which such policies could be effective in (1) increasing the performance of desired behaviours and (2) saving governments money. I provide two examples of current Canadian subsidies that I argue could be improved with the addition of a lottery option.