FAI asked Jessica Goldberg to tell us about the research papers that have influenced how she thinks about savings and the poor. This is what she told us:
I tend to think of the papers that have influenced my thinking about savings as making three related, big-picture points:
- Savings is complicated
- Savings matters
- We can help!
Together, these papers remind me that we need to think carefully about why people save, about the relationship between savings and investment, and about what types of savings products are most likely to improve people’s wellbeing.
Savings is complicated
To me, Robert Townsend’s 1994 paper "Risk and Insurance in Village India" really captures important ways that people’s complicated lives and social situations affect their decisions around savings. Townsend’s paper is really about insurance – it poses and tests a model of informal insurance in which villagers help each other smooth against idiosyncratic shocks but not aggregate shocks. But it is clear from the model that there is no room for savings if informal insurance is perfect. That makes two important things clear to me. First, we have to think separately about precautionary savings versus savings for investment or purchases of large, indivisible (“lumpy”) items like durable goods. Insurance can help people meet the precautionary savings motive but not the investment or lumpy-purchase motive. Credit, at least in its most standard form, is better designed to meet the investment motive. Second, social norms or constraints affect how people consume and save, and when we think about why people save or don’t save, or what products and policies can help them save more, we need to be cognizant of the social forces that might act as constraints to their decision-making.
Other papers that make important points about the ways in which savings are complicated are Abhijit Banerjee’s and Sendhil Mullainathan’s 2010 working paper, "The Shape of Temptation: Implications for the Economic Lives of the Poor," and "Behavioral Foundations of Microcredit: Experimental and Survey Evidence from Rural India," by Michal Bauer, Julie Chytilová, and Jonathan Morduch in the April 2012 American Economic Review. The first highlights the ways in which the very poor face a different decision-making problem than the wealthier, even if they share the same behavioral tendencies towards impatience. The second shows that people look for tools to manage their tendencies to consume rather than save, even when those tools are not well-designed as savings products.
I found Pacaline Dupas and Jonathan Robinson’s experiment in Kenya, "Savings Constraints and Microenterprise Development: Evidence from a Field Experiment in Kenya," absolutely fascinating. They offer savings accounts to market vendors and bike taxi drivers at a market in Kenya, and have high take-up and big effects. It’s interesting that take-up and use of these accounts is so high among those in the experimental “treatment” group who received assistance with account opening and had the initial fees paid on their behalf, despite high withdrawal fees that constitute a negative real interest rate on savings. Even more interesting, these accounts have really big effects on the investments that female market vendors make in their businesses, and these investments are profitable! This is excellent news, but it raises a puzzle that neither Dupas and Robinson nor other authors working on experimental evaluations of savings products have been able to fully answer: what is the mechanism through which these accounts have such positive effects? There are two leading hypotheses, both connected to the literature about why savings is complicated. The first is that people have time-inconsistent preferences, and the second is that they face social pressure to share money rather than save it. There are a number of studies (including one that I ran with co-authors at the University of Michigan) that have been designed explicitly to test these hypotheses, but there isn’t yet conclusive evidence that either hypothesis fully accounts for the big positive effects of savings accounts on well-being.
We can help!
While we don’t know exactly how savings products lead to improved outcomes, we do have strong evidence that savings products designed to help people overcome specific obstacles to savings can be extremely effective. "Tying Odysseus to the Mast: Evidence from a Commitment Savings Product in the Phillipines," by Nava Ashraf, Dean Karlan, and Wesley Yin, is the paper that first introduced me to commitment savings accounts. Commitment accounts allow customers to place restrictions on their own use of their money. They potentially allow people to overcome their time-inconsistency by separating their savings decision from their opportunity to instead receive utility from consuming immediately. Ashraf et al. find that people who have present-biased preferences are more likely than others to open commitment accounts, and that using the accounts changes savings behavior even after the accounts themselves have expired. Recently, I worked with Xavi Giné, Dan Silverman, and Dean Yang on an experiment in Malawi that finds evidence supporting the idea that commitment accounts can be valuable for people with time-inconsistent preferences: these time-inconsistent preferences, rather than unanticipated changes in income or other shocks, drive the tendency to deviate from plans made about the future, so locking oneself into a plan can help achieve savings goals without unduly limiting flexibility to respond to shocks.
Seeking out a commitment savings account requires people to be sophisticated about their time-inconsistency. Esther Duflo, Michael Kremer, and Jonathan Robinson have a new paper "Nudging Farmers to Use Fertilizer: Theory and Experimental Evidence from Kenya," in the October 2011 American Economic Review, that lays out a model of how people who aren’t fully aware of their tendency towards time-inconsistency may procrastinate on making profitable investments in fertilizer. They show that marketing fertilizer to farmers just after on season’s harvest can sharply increase the amount of fertilizer used at the next season’s planting. This is especially important because it highlights the special challenges of saving for investment when both income and investment are “lumpy.” Farmers receive the bulk of their income at one point in the year – the harvest – and then face the challenges of spreading consumption across the rest of the year and preserving money to make investments. The investment that is most important for farmers is in variable agricultural inputs such as fertilizer, and that investment is made at planting – often six or more months after they’ve received income. “Savings” can come in the form of an advance purchase of fertilizer – it’s savings in kind, rather than in cash. Duflo et al. show that this kind of savings, when it’s well-designed for local conditions and to address the specific behavioral obstacle, can have big effects on investment and profits.