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Borrowing to Save

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  • Morduch Jonathan

Abstract

Poor families often borrow even when they have savings sufficient to cover the loan. The practice is costly relative to drawing down one's own savings, and it seems particularly puzzling in poor communities. The families themselves explain that it is easier to repay a moneylender than to "repay" oneself, an explanation in line with recent findings in behavioral economics. In this context, high interest rates on loans can help instill discipline. While workable, the mechanism is hardly optimal; options could be improved through access to a contractual saving device that helps savers rebuild assets after a major withdrawal.

Suggested Citation

  • Morduch Jonathan, 2010. "Borrowing to Save," Journal of Globalization and Development, De Gruyter, vol. 1(2), pages 1-11, December.
    • Handle: RePEc:bpj:globdv:v:1:y:2010:i:2:n:8
    DOI: 10.2202/1948-1837.1153
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    References listed on IDEAS

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    1. Nava Ashraf & Dean Karlan & Wesley Yin, 2006. "Tying Odysseus to the Mast: Evidence From a Commitment Savings Product in the Philippines," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(2), pages 635-672.
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    3. Beatriz Armendáriz & Jonathan Morduch, 2010. "The Economics of Microfinance, Second Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262014106, December.
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    6. Basu, Karna, 2009. "A behavioral model of simultaneous borrowing and saving," MPRA Paper 20442, University Library of Munich, Germany.
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    Citations

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    1. Torben M. Andersen & Joydeep Bhattacharya, 2021. "Why mandate young borrowers to contribute to their retirement accounts?," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 71(1), pages 115-149, February.
    2. Emran, M. Shahe & Shilpi, Forhad, 2021. "Microfinance, Moneylenders, and Economic Shocks: An Assessment of the Bangladesh Experience," MPRA Paper 111159, University Library of Munich, Germany.
    3. Wooyoung Lim & Sujata Visaria, 2020. "The Borrowing Puzzle: Why Do Filipino Domestic Workers in Hong Kong, China Borrow Rather than Dissave?," Asian Development Review, MIT Press, vol. 37(2), pages 77-99, September.
    4. Augsburg, Britta & Caeyers, Bet & Giunti, Sara & Malde, Bansi & Smets, Susanna, 2023. "Labeled loans and human capital investments," Journal of Development Economics, Elsevier, vol. 162(C).
    5. Carolina Laureti, 2015. "The Debt Puzzle in Dhaka’s Slums: Do Poor People Co-hold for Liquidity Needs?," Working Papers CEB 15-021, ULB -- Universite Libre de Bruxelles.
    6. Carolina Laureti & Alain De Janvry & Elisabeth Sadoulet, 2017. "Flexible Microfinance Products for Financial Management by the Poor: Evidence from SafeSave," Working Papers CEB 17-036, ULB -- Universite Libre de Bruxelles.
    7. Carolina Laureti, 2017. "Why do Poor People Co-hold Debt and Liquid Savings?," Working Papers CEB 17-007, ULB -- Universite Libre de Bruxelles.
    8. Berg Claudia & Emran M. Shahe, 2020. "Microfinance and Vulnerability to Seasonal Famine in a Rural Economy: Evidence from Monga in Bangladesh," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 20(3), pages 1-36, July.

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