Nov 8, 2012

Peer Pressure and Savings (Chile)

From a new paper by Kast, Meier, and Pomeranz (October 2012):
We test the effectiveness of self-help peer groups as a commitment device for precautionary savings, through two randomized field experiments among 2,687 microentrepreneurs in Chile. The first experiment finds that self-help peer groups are a powerful tool to increase savings (the number of deposits grows 3.5-fold and the average savings balance almost doubles). Conversely, a substantially higher interest rate has no effect on most participants. A second experiment tests an alternative delivery mechanism and shows that effects of a similar size can be achieved by holding people accountable through feedback text messages, without any meetings or peer pressure.
The authors explain:
We conducted two randomized field experiments among low-income micro- entrepreneurs in Chile to study the power of self-help peer groups as a commitment device for precautionary savings. Our first experiment, the “Peer Group Experiment,” shows that self-help peer groups have a strong impact on savings. We offered 2,687 micro-entrepreneurs, who met regularly as members of a microcredit association, the opportunity to open a formal savings account. Participants were randomly assigned to one of three conditions: 1) a control condition where individuals only received the basic account; 2) a Self-Help Peer Group Treatment where participants additionally had the option to publicly announce their savings commitment, which was then monitored in the weekly meetings; and 3) a High Interest Rate Treatment with a 5% real interest rate (instead of the 0.3% in the basic account), which serves as a benchmark to measure the effectiveness of the Peer Group Treatment. 

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