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

John, Anett (2014) Just a few cents each day: can fixed regular deposits overcome savings constraints? Economic Organisation and Public Policy Discussion Papers (EOPP 51). Suntory and Toyota International Centres for Economics and Related Disciplines, London, UK.

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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.

Item Type: Monograph (Report)
Official URL: http://sticerd.lse.ac.uk/
Additional Information: © 2014 The Author
Divisions: STICERD
Subjects: H Social Sciences > HB Economic Theory
Date Deposited: 22 Jul 2014 10:37
Last Modified: 15 Nov 2021 00:07
URI: http://eprints.lse.ac.uk/id/eprint/58103

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