11/09/2009 Lecture 18: Savings Exam will cover reading + class discussions + class notes exam questions will be short questions w/ short answers, not MC or TF. Not algebra/math problems---can answer them all using words, or math if you like. Use T/F questions to which there is no black/white answer Assumption: people want a smooth level of consumption. They don't earn consumption, though, they earn income. -> in the case of the poor, they spend most of their income on food, so they need to have minimum amount of consumption per day -> this breaks once we're no longer poor, and we consume durable goods such as shoes and bikes, which last us longer, and are harder to model saving = income - consumption -> positive: saving -> negative: borrowing Why do people want to save? - sometimes their income is super-irregular: seasonal income must last several months or a whole year (income is volatile) - need buffer for financial shock (consumption is volatile), such as health spending, food spending, etc. How do poor manage to save? - store money in safe spot - hold money for other people (moneyguarding) - to get paid more frequently, they swap money with someone who is paid on a different interval than them, so both smooth the income - to get paid less frequently at larger sums, they make rotating pools of money that only one person gets paid every period Why do they play these more frequent/less frequent games instead of managing their own savings - inflation - risk of theft - abusive/addicted people may spend money all at once, whereas if its earned regularly, they might spend it on more required items - feel obligated to lend out money to others if you have too much of it - present-day bias---we need it _now_!---but that's just a perception - the are no banks---there's low to zero profit, and people typically loan to friends w/ no-interest loans, so that's hard for banks to compete with. ROSCAs (as per besley) - savings club where people get larger lump-sum less frequently - these are incredibly widespread, and take on many forms - friendly societies (anglo-saxon societies), burial societies (south/east africa), barn-raising societies in agricultural societies # Burges and Pande (2005) - how to help poor save? make banks open branches in rural, unprofitable areas to make them transact w/ the poor. - follows indian banking policy history when banks opened in rural areas - between 1977 and 1990, for each time registered bank wanted to open branch, it had to open 4 others in rural areas that didn't have any bank - further, branches had to offer comparable terms to the rural areas as the ones they built - what effect did this have on living standards? - caveats: banks brought on other things---jobs, credit, finacial advice, spillover from those that got service Branch expansion program (chart on p. 9) - branch expansion conditional on the number of banks already in an area - until 1977, they could do whatever they want, and only developed in highly banked areas - after 1977, they could only open banks if they opened 4 others in undeveloped areas. all of a sudden in 1977, the number of previous banks becomes a worse indicator for growth. Effect on rural credit (chart on p. 10) - credit at places w/ lots of banks before 1977 dropped, whereas it grew in rural areas after 1977. - unfortunately, there was no data on savings, jobs, etc. So all we can conclude is that banks or credit matter for poverty. So basically we can say banks/credit was accelerated in areas where banks were now forced to grow---the legislation worked to grow banks in unpopular areas. But then in chart on p. 11, they claim that poverty went down in the 1977-1990 in rural areas, implying some causality. # Dupas and Robinson (2009) - question: are the poor savings-constrained? we saw previously that microenterprises are credit-constrained---loan them more and they borrow more to good measure. now we want to know if giving microenterprises access to savings accounts - focus on microenterprise in Kenya, who don't initially have savings account Microenterprises (market vendor, bicycle taxi, drivers, self-employed artisans) - take random subset of them, and pay their opening fee for a crappy savings account -> no nominal interest rate (high inflation) -> high withdrawl fees - if there was no constraint on savings, no one would use this account - even if someone did use this account, it wouldn't change his/her business - some students questioned ethics of the arrangement After 6 months, 40% of people put money in - women generally used savings account more than men (statistically significantly more) - women invested more in their businesses than men, statistically significantly so. Author's conclusions - women are more present-biased in making their savings decisions - but in a sophisticated way: open bank accounts because they commit them to savings, and the large withdrawl fee and long distance to travel to bank allows them to commit to saving their money. Present bias - we're more impatient about doing things in the near future, and as the thing you're considering is farther away, you care less about it. - "hyperbolic discounter"/"time-inconsistent" are terms used in economics for this effect - naive vs. sophisticated -> naive: they always pick "tomorrow" over "today," so they keep changing their mind. -> sophisticated: they know they will be inconsistent and keep procrastinating, so they let themselves be forced to some commitment by setting a date in the distance or something like that, and not budging from it. Stickk---website that lets you make contracts with yourself and put money on the line to force yourself to commit to various things Ashraf, Karlan, Yan - SEED (Save, Earn, Enjoy Deposits) program---offers lockbox (clay box) that was easy to break, but no one did - Offered this to random peoople in philipines - Clients invited to specify a savings goal or date until which they wanted to save the money - Half of 3000 clients were offered SEED, and half were just given normal banking relationship. - All participants were asked questions to gauge if they were patient, somewhat impatient, or most impatient about events in the near-future and farther-future - Found that people who wanted SEED are present-biased. These are sophisticatedly present-biased: they know they need a commitment to avoid time-inconsistency - Also found that someone who used SEED ended up saving more than those that didn't use it.