Abstract
Empirical evidence from developing countries 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. Why do people not just save at home, instead of relying on such costly devices? In a savings model with hyperbolic discounting and uncertainty, I show why a commitment to fixed regular savings deposits can help individuals to achieve the welfare-maximising level of savings, when they would not be able to do so on their own. Such regular-instalment commitment products further increase welfare by smoothing savings contributions. The setting is enriched by endogenising take-up, and giving individuals the ability to choose their own commitment stakes. The results point to the possibility that the observed demand for costly informal savings devices may simply represent a demand for commitment savings products with fixed periodic contributions, as they are commonly offered by banks in rich countries.
Original language | English |
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Pages (from-to) | 909-924 |
Number of pages | 16 |
Journal | Revue Economique |
Volume | 68 |
Issue number | 5 |
DOIs | |
Publication status | Published - 20 Sept 2017 |