Just a few cents each day: can fixed regular deposits overcome savings constraints?

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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: J1 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2014-03
New Economics Papers: this item is included in nep-exp, nep-iue and nep-mfd
References: Add references at CitEc
Citations:

Downloads: (external link)
http://eprints.lse.ac.uk/58103/ Open access version. (application/pdf)

Related works:
Working Paper: Just a Few Cents Each Day: Can Fixed Regular Deposits Overcome Savings Constraints? (2014)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:58103

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().