IDEAS home Printed from https://ideas.repec.org/a/jid/journl/y2009v18i2p142-159.html
   My bibliography  Save this article

Decision Risks and Individual Development Accounts: An Alternative View

Author

Listed:
  • Edmund Khashadourian

    () (United Way of Greater Los Angeles)

Abstract

This article analyzes the impact of risk on decisions made by the poor within the context of the Individual Development Account (IDA) program. IDA is a matched savings program designed to help low-income households invest in appreciating assets. For these households, the risk involved with participation in IDA relates to the sacrifice they make by reducing current consumption - sometimes in a significant way - in order to be able to save. The program does not offer a match on savings per se; rather, it offers the match only when savings are invested in certain assets. Since there is no guarantee that IDA savings will be converted into assets qualified for the IDA match at the time of enrollment, participation in the program is characterized as an inherently risky decision, which is governed by different sets of behavioral factors, including the risk-taking preferences of low-income households. Consideration of risk provides an alternative explanation for issues related to program take-up, inactivity, and attrition rates. It also offers new and simple ideas on how to improve results. In addressing these problems, the article recommends using an IDA model that includes a flexible match component, to insure against the risk of unmatched savings and complement the existing IDA match structure. Simple modifications to current policy will maintain the total cost of IDA match at the existing levels. Introduction of a flexible match may mitigate the risk of decision to participate in IDA for the most vulnerable group of participants. It can also potentially reduce the percentage of inactive accounts while improving the overall retention rates in the program. Moreover, the recommended changes would not alter the nature of the IDA program, as the flexible match would only amount to a fraction of the total asset investment match.

Suggested Citation

  • Edmund Khashadourian, 2009. "Decision Risks and Individual Development Accounts: An Alternative View," Journal of Income Distribution, Ad libros publications inc., vol. 18(2), pages 142-159, June.
  • Handle: RePEc:jid:journl:y:2009:v:18:i:2:p:142-159
    as

    Download full text from publisher

    File URL: http://jid.journals.yorku.ca/index.php/jid/article/view/23369
    Download Restriction: Some fulltext downloads are only available to subscribers. See JID website for details.

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    Keywords

    asset building; expected-utility theory; asset match; flexible match; Hybrid IDA; Individual Development Account; intertemporal choice; poverty; risk aversion; saving; subsidized interes rate; welfare loss;

    JEL classification:

    • A12 - General Economics and Teaching - - General Economics - - - Relation of Economics to Other Disciplines
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • I30 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General
    • I32 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Measurement and Analysis of Poverty
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:jid:journl:y:2009:v:18:i:2:p:142-159. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Timm Boenke). General contact details of provider: http://edirc.repec.org/data/gyorkca.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.