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A behavioral model of simultaneous borrowing and saving

Karna Basu ()

MPRA Paper from University Library of Munich, Germany

Abstract: Why do individuals borrow and save money at the same time? I present a model in which sophisticated time-inconsistent agents, when faced with a future investment opportunity, rationally choose to save their wealth and then borrow to fund the investment. The combination of savings and a loan generates incentives for future selves to invest optimally by punishing over-consumption. This paper contains two main results. First, I show that agents who simultaneously save and borrow can have higher lifetime welfare than those who don’t. Second, I show that agents who have access to a non-secure savings technology can be better off than those who only have access to secure savings.

Keywords: saving; borrowing; microfinance; hyperbolic discounting (search for similar items in EconPapers)
JEL-codes: D03 O1 O12 (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-cbe, nep-dev, nep-evo and nep-mfd
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:20442

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