Just a Few Cents Each Day: Can Fixed Regular Deposits Overcome Savings Constraints?

Anett John (née Hofmann)

STICERD - Economic Organisation and Public Policy Discussion Papers Series from Suntory and Toyota International Centres for Economics and Related Disciplines, LSE

Abstract: Empirical evidence suggests that there is a high demand for informal savings mechanisms even though these often feature negative returns - such as deposit collectors, ROSCAs, microloans, and informal borrowing. This paper argues that individuals may face even higher negative returns to saving at home due to hyperbolic discounting and claims on savings by relatives. I outline a model that shows why hyperbolic discounters cannot reach their welfare-maximising level of savings, and why a commitment savings product with fixed period contributions can increase their achievable savings level. Using a novel dataset obtained from a small microfinance institution in Bangladesh, the paper then presents some first empirical evidence on the effects of a commitment savings product with fixed regular instalments. I find that the introduction of the regular saver product was associated with an increase in individuals' savings contributions of 180 percent after a periods of five months. The paper concludes that the provision of commitment savings products with fixed contributions may reduce savings constraints and increase individuals' welfare, providing a substitute for costly informal mechanisms. However, since the data originates from a field study with self-selection problems rather than a randomized controlled experiment, further studies are needed to confirm this effect.

Keywords: commitment savings; hyperbolic discounting; Bangladesh (search for similar items in EconPapers)
JEL-codes: D14 O11 O16 (search for similar items in EconPapers)
Date: 2014-03
New Economics Papers: this item is included in nep-dev, nep-exp, nep-iue and nep-mfd
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https://sticerd.lse.ac.uk/dps/eopp/eopp51.pdf (application/pdf)

Related works:
Working Paper: Just a few cents each day: can fixed regular deposits overcome savings constraints? (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:cep:stieop:051

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