Savings Constraints

14.74 Savings Constraints Last time we discussed what a household would do to smooth risk with borrowing and savings. We saw that if they can borrow and save, they will try to maintain a smooth consumption profile, especially if the shocks are temporary. We discussed what would happen if people where credit constrained. However, we did not discuss what would happen if households had difficulty to save. Two sources for those possible difficulties: • External: • Internal: 1 Savings Constraints If you want to save, where can you keep the money? Why may a bank be reluctant to keep small savings account? Is this because they are evil? is there an easy solution to this problem? Poor households use all sorts of ways to save: Self Help Groups • Rotating Savings and Credit Associations (roscas) • Productive assets (eg.: Bullocks) 1 Possible sources of inefficiency: Roscas: you don't get the money when you need it. • Deposit collectors (who will charge negative interest rates to take the money) • Productive assets: what will you do with ONE bullocks! (Rosenzweig and Wolpin). An experiment which try to test the idea that households may be "savings constrained" (Dupas and Robinson, 2009). Open free savings account for small business owners at a local bank (waive the opening fee, which is normally $7 (for business owners who make on average about $2 a day). The accounts have no interest and a withdrawal fee of 50 cents for transfers below 88, 80 cents for withdrawals between $8 and $15 and 81.5 above. At baseline, 2% of people had an account. Researchers did a baseline with 300 people, and randomly selected half of them, to whom they offered to pay the opening fees for a savings account. After 6 months, they had people fill daily log-books on business activities and expenditures, for about 3 months. Attrition was high, so resulting sample is only 185. Usage: • Women Mean: 3,700 Ksh (US $57) 25%: 0 Ksh 50%: 150 Ksh (US $2) 75%: 1,900 Ksh (US $29) -90%: 11,500 Ksh (US $176) • Men Mean: 1,200 Ksh (US 818) 25%:0 Ksh 50%: 50 Ksh (US $0.67) 2 75%: 400 Ksh (US $6) 90%: 1,600 Ksh (US $24) Results Increase in in investment in the business. Some increase in consumption • Decrease in sensitivity to shocks. 2 Savings and Self Control We just reviewed "external" savings constraints. In fact there may also be "internal" constraints. The results we saw last time assume that the individual has a utility function with a constant discount rate 3. In fact, there is evidence that individuals may be "present biased", Le. they discount tomorrow with respect to today more than they discount day after tomorrow with respect to tomorrow. Such preferences lead to " preference reversal" when people are asked to chose between a certain amount today and a higher amount in the future. - Would you prefer P200 today or P300 guaranteed in a month? -Would you prefer P200 in 6 months or P300 guaranteed in 7 months? In the table in the handout, the light grey indicate preference reversal in the "expected order. Note that people also reverse their preferences in the opposite order Could be time-inconsistencies, or mistakes, or worry that the future is uncertain. Such preferences are some times represented as "hyperbolic discounting": with 3 periode, the individual maximizes: Maxu(c1)+3[u(22) + (13)] Write down the traditional exponential utility function to compare: Such individuals will not save enough. Why? Example: saving for fertilizer in Kenya. 3 • Two seasons a year: at the end of harvest, you have lots of maize. • You need go keep the maize for eating, and you can decide to buy fertilizer at some point before next planting season. Early on, you have enough to cat, so you are planning to eat today, save in period 2 and buy fertilizer then (there is no reason to buy it today since you do not need it today, so why bother to go to the shop now, when you can go later!! note: it is not about spending. the money, since you are planning to save in period 2 anyway, it is about the cost of going to the shop). However, later on, you are now impatient, and you may eat everything, instead of pur- chasing the fertilizer. • In this way, most people make plans to use fertilizer early in the season but do not end up actually doing it. In kenya it is the case in the data: about 98% of farmer plan to use fertilizer early on, but 20%-30% end up doing it! What kind of interventions could help period 1 farmer to use fertilizer. • The SAFI program: offer farmers to buy fertilizer right after harvest, and get free delivery. Why should it work? Resalts in table for different version of the program: SAFI free delivery at harvest time SAFI with choice of timing See results in table,