London School of Economics EOPP: Economic Organisation and Public Policy Programme LSE
EOPP: Economic Organisation and Public Policy Programme

Abstract for:

Just a Few Cents Each Day: Can Fixed Regular Deposits Overcome Savings Constraints?

Anett John (née Hofmann), March 2014
Paper No' EOPP 051: | Full paper (pdf)
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Keywords: commitment savings, hyperbolic discounting, Bangladesh

JEL Classification: D14; O11; O16

Is hard copy/paper copy available? YES - Paper Copy Still In Print.
This Paper is published under the following series: Economic Organisation and Public Policy Discussion Papers
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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.