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Commitment savings in informal banking markets

  • Basu, Karna

I study the provision of commitment savings by informal banks to sophisticated hyperbolic discounters. Since a consumer is subject to temptation in the period that he signs a contract, banks might exploit his desire for instant gratification even as they help him to commit for the future. Without banking, savings decisions and welfare are not monotonic in the degree of time-inconsistency. Consequently, commitment savings will lower welfare for moderately time-inconsistent agents. If loan contracts are enforceable, pure commitment savings will disappear. This will further lower welfare if the lender is a profit-maximizing bank, but raise welfare if the lender is a welfare-maximizing NGO. Finally, I consider the coexistence of a bank and NGO. There will be zero takeup of NGO-provided commitment savings if there is competition from a moneylender. But the NGO's offer will raise the agent's reservation utility, thus reducing the surplus that can be extracted by the moneylender.

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Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 107 (2014)
Issue (Month): C ()
Pages: 97-111

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Handle: RePEc:eee:deveco:v:107:y:2014:i:c:p:97-111
Contact details of provider: Web page: http://www.elsevier.com/locate/devec

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