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The Time-Inconsistency Factor: How Banks Adapt to their Mix of Savers

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  • Carolina Laureti
  • Ariane Szafarz

Abstract

This paper starts from a puzzle. On the one hand, the literature documents that a large proportion of poor people are ready to forgo interest on rigid – or commitment – savings accounts to discipline their future selves. On the other, our stylized facts from Bangladesh show that microfinance institutions pay a premium on commitment savings with respect to flexible savings. To address this puzzle, we build an equilibrium model in which a monopolistic bank offers flexible and commitment savings accounts to both rational and time-inconsistent agents. Two factors concur to explain why the bank may find it optimal to pay a commitment premium even though time-inconsistent savers do not necessarily demand one. First, the bank needs commitment accounts to meet its reserve requirements. Second, it cannot segment its clientele ex ante, and rational savers demand compensation for commitment. Last, we discuss the consequences of our findings from a regulatory perspective.

Suggested Citation

  • 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.
    • Handle: RePEc:sol:wpaper:2013/134499
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Why pay interest on deposits if depositors do not ask for interest?
      by Economic Logician in Economic Logic on 2013-01-22 21:49:00

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    1. Marc Labie & Carolina Laureti & Ariane Szafarz, 2013. "Flexible Products in Microfinance: Overcoming the Demand-Supply Mismatch," Working Papers CEB 13-044, ULB -- Universite Libre de Bruxelles.

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    More about this item

    Keywords

    Savings; banks; microfinance; commitment; flexibility; present-bias; hyperbolic discounting; Bangladesh;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • 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
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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