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Financial Inclusion Through Savings: Commitment Devices, Mobile Money, and the Role of Trust

Paper Session

Saturday, Jan. 6, 2018 2:30 PM - 4:30 PM

Pennsylvania Convention Center, 109-A
Hosted By: American Economic Association
  • Chair: Paul Gertler, University of California-Berkeley

Workplace Signaling and Financial Commitment: Evidence From a Field Experiment

Emily Breza
,
Harvard University
Martin Kanz
,
World Bank
Leora Klapper
,
World Bank

Abstract

This paper provides evidence of signaling motivations in financial decisions. We conduct a field experiment with workers at a large manufacturing firm in Bangladesh, who are offered the opportunity to sign up for a basic commitment savings product linked to their payroll accounts. We vary whether a manager provides an endorsement of the product, and whether information about the worker’s take-up decision is communicated back to the employer. We find evidence consistent with workplace signaling motivations in the decision to open commitment savings accounts. Workers respond to the endorsement only when take-up information is communicated back to the employer. In contrast, the employer endorsement alone has no effect on the decision to open an account, and employer feedback decreases take-up when it is not paired with an explicit employer endorsement. The effects are driven by promotion-seeking individuals with a longer intended duration of employment, who can credibly signal their commitment to the firm by entering into a financial contract with a longer time horizon than their peers. Using a separate experiment, in which managers evaluate employees based on work performance and financial information, we show that workers’ decisions are rational: managers are more likely to invest in employees who signal commitment to the firm by signing up for a savings contract with longer maturity. These findings indicate the presence of signaling motivations and significant strategic behavior when financial decisions are observable to the employer. Our results also point to an important rationale for tying financial decisions to the workplace – the reduction of information asymmetries in the employer-employee relationship.

Why Do Defaults Affect Behavior? Experimental Evidence from Afghanistan

Joshua Blumenstock
,
University of California-Berkeley
Michael Callen
,
University of California-San Diego
Tarek Ghani
,
Washington University-St. Louis

Abstract

This paper reports on an experiment examining why default savings assignments affect behavior. Working with Afghanistan’s largest firm, we designed and deployed a new mobile phone-based automatic payroll deduction system. Each of 967 employees at the firm was randomly assigned a default contribution rate (either 0% or 5%) as well as a matching incentive rate (0%, 25%, or 50%). We find that employees initially assigned a default contribution rate of 5% are 40 percentage points more likely to contribute to the account 6 months later than individuals assigned to a default contribution rate of zero; to achieve this effect through financial incentives alone would require a 50% match from the employer. We also find evidence of habit formation: default enrollment increases the likelihood that employees continue to save through the program substantially after the end of the trial (when matching incentives are removed), and increases employees’ self-reported interest in saving and sense of financial security. To understand the mechanism behind these effects, we conducted several experimental interventions to try to move employees away from their default contribution. Ruling out several competing explanations, we find evidence that the default effect is driven largely by a combination of present-biased preferences and the cognitive cost of calculating savings trajectories under alternate contribution levels.

Banking on Trust: How Debit Cards Enable the Poor to Save More

Pierre Bachas
,
Princeton University
Paul Gertler
,
University of California-Berkeley
Sean Higgins
,
University of California-Berkeley
Enrique Seira
,
Technological Autonomous University of Mexico (ITAM)

Abstract

Trust is an essential element of economic transactions, but trust in financial institutions is low, especially among the poor. Debit cards provide not only easier access to savings, but also a mechanism to monitor bank account balances and thereby build trust in a financial institution. We study a natural experiment in which debit cards are rolled out to beneficiaries of a Mexican conditional cash transfer program whose benefits are already directly deposited into a savings account. Using administrative data on over 340,000 bank accounts over four years, we find that prior to receiving a debit card, beneficiaries do not save in these accounts. Beneficiaries then begin to increase their savings after 9 to 12 months with the card. During this initial stagnant period, they use the card to check their balances frequently, and the number of checks decreases over time as their reported trust in the bank increases. After 1 to 2 years, the debit card causes the savings rate to increase by 3 to 5 percent of income. Using household survey panel data, we find that this effect represents an increase in overall savings.

The Limits of Commitment: Who Benefits From Illiquid Savings Products?

Niklas Buehren
,
World Bank
Markus Goldstein
,
World Bank
Leora Klapper
,
World Bank
Tricia Koroknay-Palicz
,
World Bank
Simone Schaner
,
Dartmouth College

Abstract

Worldwide, the market for checking overdrafts is $35 billion. These overdrafts often incur high fees and/or interest rates, which are costly to consumers and can result in a debt cycle where new loans are taken to meet these obligations. Working with a private commercial bank in Ghana, we examine the impacts of a commitment savings product designed to help clients taking repeated overdrafts to break the debt cycle. The savings product was very popular, with 73 percent of those offered the product taking it up. The product significantly increased savings with the commercial bank during the commitment period without increasing the average amount in overdraft – this effect holds for participants with both above- and below-median overdraft histories with the bank. However, this masks important heterogeneity in overall savings behavior. After accounting for other sources of savings, we find that above-median overdrafters do not accrue new savings during the commitment period. Rather, they draw down other savings to offset the committed amount and are more likely to take on new debt – as a result, their net savings actually decrease during the commitment period. Individuals who are below median overdraft users, on the other hand, significantly increase savings – both during and after the commitment period. Taken together, these results suggest that the financial pressures and/or self-control problems that lead to heavy use of overdraft facilities also drive these individuals to undo any commitment to accumulate savings.
Discussant(s)
Jenny Aker
,
Tufts University
Jessica Goldberg
,
University of Maryland
Leora Klapper
,
World Bank
Diego Ubfal
,
Bocconi University
JEL Classifications
  • O1 - Economic Development
  • G2 - Financial Institutions and Services