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Formal Savings Spillovers on Microenterprise Growth and Production Decisions Among Non-Savers in Villages: Evidence from a Field Experiment

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  • Flory, Jeffrey A.

Abstract

This paper uses a randomized field experiment to identify the spillover effects of increased formal savings-use on non-farm business activity and production decisions of non-savers in villages. A panel analysis of 2,006 households in Central Malawi shows that a randomly assigned formal savings encouragement exogenously increases adoption of high-liquidity formal savings accounts in village communities. This increases receipts of cash assistance by non-saving households in the middle wealth-stratum, who may be on the margins for deciding to operate a non-farm business, or start growing cash crops or high-yielding crop varieties (HYVs). The hypothesized channel of effects is that expanded formal savings-use increases liquidity and decreases transaction costs, lowers the cost of making transfers, and thus increases receipts of cash aid even by non-saving households. Increased cash assistance is then linked among these households to increased probability of operating a non-farm enterprise or switching to HYVs or cash crops. This may result from a perception of increased security, which causes households to be more willing to take on higher-risk, higher-reward production activities. To date, little is known about how microfinance affects pre-existing informal insurance practices, and whether the production choices among those who utilize informal practices change as safety nets based on inter-household transfers strengthen or weaken when financial markets expand. This paper helps fill that gap.

Suggested Citation

  • Flory, Jeffrey A., 2012. "Formal Savings Spillovers on Microenterprise Growth and Production Decisions Among Non-Savers in Villages: Evidence from a Field Experiment," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 125013, Agricultural and Applied Economics Association.
  • Handle: RePEc:ags:aaea12:125013
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    1. repec:eee:jeborg:v:139:y:2017:i:c:p:1-25 is not listed on IDEAS
    2. Thompson, William W. & Janzen, Sarah A. & Magnan, Nicholas P. & Sharma, Sudhindra, 2015. "Social Drivers of Aspirations Formation and Failure in Rural Nepal," 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California 205757, Agricultural and Applied Economics Association;Western Agricultural Economics Association.
    3. Demont, Timothée, 2016. "Microfinance spillovers: A model of competition in informal credit markets with an application to Indian villages," European Economic Review, Elsevier, vol. 89(C), pages 21-41.

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