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A behavioral model of simultaneous borrowing and saving

Author

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  • Basu, Karna

Abstract

Why do individuals borrow and save money at the same time? I present a model in which sophisticated time-inconsistent agents, when faced with a future investment opportunity, rationally choose to save their wealth and then borrow to fund the investment. The combination of savings and a loan generates incentives for future selves to invest optimally by punishing over-consumption. This paper contains two main results. First, I show that agents who simultaneously save and borrow can have higher lifetime welfare than those who don’t. Second, I show that agents who have access to a non-secure savings technology can be better off than those who only have access to secure savings.

Suggested Citation

  • Basu, Karna, 2009. "A behavioral model of simultaneous borrowing and saving," MPRA Paper 20442, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:20442
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    File URL: https://mpra.ub.uni-muenchen.de/20442/1/MPRA_paper_20442.pdf
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    References listed on IDEAS

    as
    1. Matthew Rabin & Ted O'Donoghue, 1999. "Doing It Now or Later," American Economic Review, American Economic Association, pages 103-124.
    2. Marianne Bertrand & Dean Karlin & Sendhil Mullainathan & Eldar Shafir & Jonathan Zinman, 2005. "What's Psychology Worth? A Field Experiment in the Consumer Credit Market," NBER Working Papers 11892, National Bureau of Economic Research, Inc.
    3. Harris, Christopher & Laibson, David, 2001. "Dynamic Choices of Hyperbolic Consumers," Econometrica, Econometric Society, vol. 69(4), pages 935-957, July.
    4. Karna Basu, 2011. "Hyperbolic Discounting and the Sustainability of Rotational Savings Arrangements," American Economic Journal: Microeconomics, American Economic Association, vol. 3(4), pages 143-171, November.
    5. Michal Bauer & Julie Chytilova & Jonathan Morduch, 2012. "Behavioral Foundations of Microcredit: Experimental and Survey Evidence from Rural India," American Economic Review, American Economic Association, pages 1118-1139.
    6. DeanS. Karlan, 2007. "Social connections and group banking," Economic Journal, Royal Economic Society, vol. 117(517), pages 52-84, February.
    7. Nava Ashraf & Dean Karlan & Wesley Yin, 2006. "Tying Odysseus to the Mast: Evidence From a Commitment Savings Product in the Philippines," The Quarterly Journal of Economics, Oxford University Press, vol. 121(2), pages 635-672.
    8. Jean-Marie Baland & Catherine Guirkinger & Charlotte Mali, 2011. "Pretending to Be Poor: Borrowing to Escape Forced Solidarity in Cameroon," Economic Development and Cultural Change, University of Chicago Press, vol. 60(1), pages 1-16.
    9. Beatriz Armendariz & Jonathan Morduch, 2007. "The Economics of Microfinance," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262512017, January.
    10. David Laibson & Andrea Repetto & Jeremy Tobacman, 2000. "A Debt Puzzle," NBER Working Papers 7879, National Bureau of Economic Research, Inc.
    11. Dehejia, Rajeev & Montgomery, Heather & Morduch, Jonathan, 2012. "Do interest rates matter? Credit demand in the Dhaka slums," Journal of Development Economics, Elsevier, vol. 97(2), pages 437-449.
    12. Marianne Bertrand & Sendhil Mullainathan & Eldar Shafir, 2004. "A Behavioral-Economics View of Poverty," American Economic Review, American Economic Association, vol. 94(2), pages 419-423, May.
    13. Marianne Bertrand & Dean Karlan & Sendhil Mullainathan & Eldar Shafir & Jonathan Zinman, 2010. "What's Advertising Content Worth? Evidence from a Consumer Credit Marketing Field Experiment," The Quarterly Journal of Economics, Oxford University Press, pages 263-306.
    14. David Laibson, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, Oxford University Press, vol. 112(2), pages 443-478.
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    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. How simultaneously borrowing and saving can be rational
      by Economic Logician in Economic Logic on 2010-03-12 02:19:00

    Citations

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    Cited by:

    1. Michal Bauer & Julie Chytilova & Jonathan Morduch, 2012. "Behavioral Foundations of Microcredit: Experimental and Survey Evidence from Rural India," American Economic Review, American Economic Association, vol. 102(2), pages 1118-1139, April.
    2. Morduch Jonathan, 2010. "Borrowing to Save," Journal of Globalization and Development, De Gruyter, vol. 1(2), pages 1-11, December.
    3. Andersen, Torben M. & Bhattacharya, Joydeep, 2016. "Why mandate young borrowers to contribute to their retirement accounts?," ISU General Staff Papers 201609260700001016, Iowa State University, Department of Economics.
    4. Carolina Laureti & Ariane Szafarz, 2012. "The Time-Inconsistency Factor: How Banks Adapt to their Mix of Savers," Working Papers CEB 12-035, ULB -- Universite Libre de Bruxelles.
    5. Drugov, Mikhail & Macchiavello, Rocco, 2008. "Learning and Microlending," CEPR Discussion Papers 7011, C.E.P.R. Discussion Papers.
    6. Carolina Laureti, 2015. "The Debt Puzzle in Dhaka’s Slums: Do Poor People Co-hold for Liquidity Needs?," Working Papers CEB 15-021, ULB -- Universite Libre de Bruxelles.
    7. Carolina Laureti & Ariane Szafarz, 2014. "Having it Both Ways: A Theory of the Banking Firm with Time-Consistent and Time-Inconsistent Depositors," Working Papers CEB 14-011, ULB -- Universite Libre de Bruxelles.
    8. Matteo Marinangeli & Andrea Filippo Presbitero, 2011. "Can the Poor Save More? Evidence from Bangladesh," Mo.Fi.R. Working Papers 57, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
    9. Carolina Laureti, 2017. "Why do Poor People Co-hold Debt and Liquid Savings?," Working Papers CEB 17-007, ULB -- Universite Libre de Bruxelles.
    10. Fischer, Greg & Ghatak, Maitreesh, 2010. "Repayment frequency in microfinance contracts with present-biased borrowers," LSE Research Online Documents on Economics 58184, London School of Economics and Political Science, LSE Library.
    11. Basu, Karna, 2014. "Commitment savings in informal banking markets," Journal of Development Economics, Elsevier, vol. 107(C), pages 97-111.
    12. Jean-Marie Baland & Catherine Guirkinger & Charlotte Mali, 2011. "Pretending to Be Poor: Borrowing to Escape Forced Solidarity in Cameroon," Economic Development and Cultural Change, University of Chicago Press, vol. 60(1), pages 1-16.

    More about this item

    Keywords

    saving; borrowing; microfinance; hyperbolic discounting;

    JEL classification:

    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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