A behavioral model of simultaneous borrowing and saving

Karna Basu

Oxford Economic Papers, 2016, vol. 68, issue 4, 1166-1174

Abstract: Why do individuals borrow and save at the same time? This paper proposes a new explanation in settings where savings are not secure. A sophisticated hyperbolic discounter who foresees an investment opportunity would like to ensure that her future self has both the liquid cash and the incentives necessary to invest. I derive conditions under which she will rationally choose to save while borrowing to fund the investment. The combination of non-secure savings and a loan serves as a commitment device that generates self-inflicted punishments for non-investment. I argue that this model is particularly applicable to, but not limited to, microfinance and informal banking.

JEL-codes: D91 G21 O16 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (11)

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