The Time-Inconsistency Factor: How Banks Adapt to their Mix of Savers
AbstractThis paper starts from a puzzle. On the one hand, the literature documents that a large proportion of poor people are ready to forgo interest on rigid – or commitment – savings accounts to discipline their future selves. On the other, our stylized facts from Bangladesh show that microfinance institutions pay a premium on commitment savings with respect to flexible savings. To address this puzzle, we build an equilibrium model in which a monopolistic bank offers flexible and commitment savings accounts to both rational and time-inconsistent agents. Two factors concur to explain why the bank may find it optimal to pay a commitment premium even though time-inconsistent savers do not necessarily demand one. First, the bank needs commitment accounts to meet its reserve requirements. Second, it cannot segment its clientele ex ante, and rational savers demand compensation for commitment. Last, we discuss the consequences of our findings from a regulatory perspective.
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Bibliographic InfoPaper provided by ULB -- Universite Libre de Bruxelles in its series Working Papers CEB with number 12-035.
Length: 45 p.
Date of creation: 06 Dec 2012
Date of revision:
Publication status: Published by:
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Savings; banks; microfinance; commitment; flexibility; present-bias; hyperbolic discounting; Bangladesh;
Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- O12 - Economic Development, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-12-22 (All new papers)
- NEP-BAN-2012-12-22 (Banking)
- NEP-CBE-2012-12-22 (Cognitive & Behavioural Economics)
- NEP-DGE-2012-12-22 (Dynamic General Equilibrium)
- NEP-MFD-2012-12-22 (Microfinance)
You can help add them by filling out this form.
Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Why pay interest on deposits if depositors do not ask for interest?
by Economic Logician in Economic Logic on 2013-01-22 15:49:00
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