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Saving More to Borrow Less: Experimental Evidence from Access to Formal Savings Accounts in Chile

  • Felipe Kast

    ()

    (Centro de Estudios Horizontal)

  • Dina Pomeranz

    ()

    (Harvard Business School, Entrepreneurial Management Unit)

Poverty is often characterized not only by low and unstable income, but also by heavy debt burdens. We find that reducing barriers to saving through access to free savings accounts decreases participants' short-term debt by about 20%. In addition, participants who experience an economic shock have less need to reduce consumption, and subjective well-being improves significantly. Precautionary savings and credit therefore act as substitutes in providing self-insurance, and participants prefer borrowing less when a free formal savings account is available. Take-up patterns suggest that requests by others for participants to share their resources may be a key obstacle to saving.

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Paper provided by Harvard Business School in its series Harvard Business School Working Papers with number 14-001.

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Length: 51 pages
Date of creation: Jul 2013
Date of revision: Jun 2014
Handle: RePEc:hbs:wpaper:14-001
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