Decision Risks and Individual Development Accounts: An Alternative View

Edmund Khashadourian ()
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Edmund Khashadourian: United Way of Greater Los Angeles

Journal of Income Distribution, 2009, vol. 18, issue 2, 142-159

Abstract: This article analyzes the impact of risk on decisions made by the poor within the context of the Individual Development Account (IDA) program. IDA is a matched savings program designed to help low-income households invest in appreciating assets. For these households, the risk involved with participation in IDA relates to the sacrifice they make by reducing current consumption - sometimes in a significant way - in order to be able to save. The program does not offer a match on savings per se; rather, it offers the match only when savings are invested in certain assets. Since there is no guarantee that IDA savings will be converted into assets qualified for the IDA match at the time of enrollment, participation in the program is characterized as an inherently risky decision, which is governed by different sets of behavioral factors, including the risk-taking preferences of low-income households. Consideration of risk provides an alternative explanation for issues related to program take-up, inactivity, and attrition rates. It also offers new and simple ideas on how to improve results. In addressing these problems, the article recommends using an IDA model that includes a flexible match component, to insure against the risk of unmatched savings and complement the existing IDA match structure. Simple modifications to current policy will maintain the total cost of IDA match at the existing levels. Introduction of a flexible match may mitigate the risk of decision to participate in IDA for the most vulnerable group of participants. It can also potentially reduce the percentage of inactive accounts while improving the overall retention rates in the program. Moreover, the recommended changes would not alter the nature of the IDA program, as the flexible match would only amount to a fraction of the total asset investment match.

Keywords: asset building; expected-utility theory; asset match; flexible match; Hybrid IDA; Individual Development Account; intertemporal choice; poverty; risk aversion; saving; subsidized interes rate; welfare loss (search for similar items in EconPapers)
JEL-codes: A12 D81 D90 I30 I32 I38 (search for similar items in EconPapers)
Date: 2009
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