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A behavioral model of simultaneous borrowing and saving

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  • Karna Basu

Abstract

Why do individuals borrow and save at the same time? This paper proposes a new explanation in settings where savings are not secure. A sophisticated hyperbolic discounter who foresees an investment opportunity would like to ensure that her future self has both the liquid cash and the incentives necessary to invest. I derive conditions under which she will rationally choose to save while borrowing to fund the investment. The combination of non-secure savings and a loan serves as a commitment device that generates self-inflicted punishments for non-investment. I argue that this model is particularly applicable to, but not limited to, microfinance and informal banking.

Suggested Citation

  • Karna Basu, 2016. "A behavioral model of simultaneous borrowing and saving," Oxford Economic Papers, Oxford University Press, vol. 68(4), pages 1166-1174.
    • Handle: RePEc:oup:oxecpp:v:68:y:2016:i:4:p:1166-1174.
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    File URL: http://hdl.handle.net/10.1093/oep/gpw021
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    Citations

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    Cited by:

    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. Laureti, Carolina & Szafarz, Ariane, 2023. "Banking regulation and costless commitment contracts for time-inconsistent agents," Economic Modelling, Elsevier, vol. 129(C).
    3. Eva Kløve & Halvor Mehlum, 2019. "Positive illusions and the temptation to borrow," Oxford Economic Papers, Oxford University Press, vol. 71(3), pages 623-644.
    4. Sonia Di Giannatale. & Daniel Ventosa-Santaulària. & María José Roa. & Alexander Elbittar. & Darío Trujano., 2020. "The Role of Cognitive and Personality Characteristics in Timely Microcredit Repayment: Evidence from a Survey Conducted by Provident, Mexico. (El papel de las características cognitivas y de personali," Ensayos Revista de Economia, Universidad Autonoma de Nuevo Leon, Facultad de Economia, vol. 0(1), pages 1-20, May.
    5. Dyotona Dasgupta & Prabal Roy Chowdhury, 2020. "Simultaneous Borrowing and Saving in Microfinance," Discussion Papers 20-09, Indian Statistical Institute, Delhi.
    6. Kast, Felipe & Meier, Stephan & Pomeranz, Dina, 2018. "Saving more in groups: Field experimental evidence from Chile," Journal of Development Economics, Elsevier, vol. 133(C), pages 275-294.
    7. Chowdhury, Shyamal & Smits, Joeri & Sun, Qigang, 2020. "Does Access to Microcredit Lead to Technology Adoption by Smallholder Farmers? Experimental Evidence from Rural Bangladesh," 2020 Conference (64th), February 12-14, 2020, Perth, Western Australia 305247, Australian Agricultural and Resource Economics Society.
    8. Lovemore G. Mwanandi & Cherrie Mwanandi, 2022. "Impact of Family Structure on Household Economy in Malawi: A Case of Chinsapo 2 and Area 49, an Urban Setting in Lilongwe City in Malawi," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 6(3), pages 247-260, March.

    More about this item

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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