Teaching Children to Save: What Is the Best Strategy for Lifetime Savings?

This paper, by Alessandro Bucciol & Marcella Veronesi, recently came out in the Journal of Economic Psychology. The abstract. 

We study the effect of alternative parental teaching strategies on the propensity to save and the amount saved during adulthood. Using a panel dataset from the Dutch DNB Household Survey we find that parental teaching to save increases the likelihood that an adult will save by 16%, and the saving amount by about 30%. The best strategy involves a combination of different methods (giving pocket money, controlling money usage, and giving advice about saving and budgeting). The effect of parental financial socialization is persistent with age, but decays at elder age for the propensity to save.

A draft is here.  

Savings by and for the Poor: A Research Review and Agenda

This paper by Dean S. Karlan, Aishwarya Ratan & Jonathan Zinman has an interesting discussion of the behavioural bias that affect the usage of saving products. An introduction in the section

The behavioral social sciences suggest several cognitive tendencies that can lead to undersaving or more broadly to “present-bias”. Behavioral research has documented biases in preferences (costly self-control, loss aversion, anticipatory utility); in expectations/perceptions of prospects (e.g., over-optimism); in price perceptions (e.g., exponential growth bias); and in whether and how to make a decision conditional on all other variables (e.g., limited attention, planning fallacies). Understanding these biases can help us identify more and less malleable drivers of undersaving, and design products and processes that help people save as they aspire to in their more reflective moments. Our review below focuses on field (not lab) evidence linking specific behavioral biases to savings behavior in developing countries; see DellaVigna (2009) for a broader review, and Zinman (forthcoming) for a complementary review of behavioral theories and evidence related to over-borrowing.

It also gives ideas for relevant research that needs to be done.  

The One-Child Policy and Household Savings (China)

Exploiting the birth of twins as an identification strategy, we provide direct empirical evidence on the micro-channel and show its quantitative relevance in accounting for the rise in the household saving rate since the inception of the policy in 1980. Our quantitative OLG model can explain from a third to at most 60% of the rise in aggregate saving rate; equally important is its implied shift in the level and shape of the age-saving profile consistent with micro-level estimates from the data.

That is an excerpt of the abstract of this paper by Taha Choukhmane, Nicholas Coeurdacier, & Keyu Jin. 

Prompting Microfinance Borrowers to Save: A Field Experiment from Guatemala

From a paper by Jesse Atkinson, Alain de Janvry, Craig McIntosh, & Elisabeth Sadoulet 

In collaboration with Crédito Hipotecario Nacional (CHN), we randomized the deployment of new behaviorally-motivated financial products across the bank’s entire microfinance clientele. CHN offers microfinance loans with monthly repayments over terms of 12 to 36 months, and therefore provides a unique opportunity to use the discipline of regular loan repayments over a long period of time to offer borrowers different savings strategies. In order to focus on the behavioral dimensions of savings product design, the treatments induce no direct financial incentives for clients at all and instead differ only in the manner and extent to which borrowers are ‘nudged’ to save. Since many commercial financial institutions may find binding their clients into true commitment products difficult or objectionable, our products are driven by asking clients to determine a savings trajectory that they wish to follow over the course of the loan and then prompting them to make these self-specified savings deposits at the time of each loan payment. The bank does not, however, penalize clients for failing to meet this trajectory, and deposits, once made, can be freely withdrawn at any time without charges. Our products therefore are based more on provoking mental accounting and reinforcing the salience of savings (Karlan et al., 2010) than on the use of true commitments such as the ‘lock box’ of the SEED accounts of Green Bank in the Philippines (Ashraf et al., 2006), the non-withdrawable deposits of the Grameen Pension Scheme (Collins et al., 2009), or the free deposits and costly withdrawals implemented by Dupas and Robinson (2009). Our results show that this light-handed, easily scaled approach can indeed be very successful at increasing savings balances (p. 2-3).

From the abstract

Can microfinance borrowers use the discipline of regular loan repayments in order to accumulate savings if prompted to do so? In an experiment, we offered commercial savings products to the microfinance borrowers of Guatemala’s largest public-sector bank. We find that giving these borrowers the opportunity to develop a savings plan and be reminded of saving at the time of loan repayment caused no increase in the opening of savings accounts but led to balances among savers that were two and a half times those in the control. A second treatment arm that proposed a default savings contribution of 10% of the loan payment caused the fraction of clients using linked savings accounts to double, as well as elevated deposits among savers, leading to final savings balances that were more than five times the control.

A draft is here.  

What a bank account can do . . . (Kenya)

The experiment described in this paper provides strong evidence that a large fraction of female micro-entrepreneurs in rural Kenya face major savings constraints. These constraints are so strong that around 40% of market women decided to take up savings accounts which offered a negative real interest rate. This result suggests that the alternative savings opportunities that market women face offer an expected return even more negative.  

Market women use these accounts to save up to increase the size of their business and, in turn, increase their income and expenditures. We estimate potentially very large returns to capital for the businesses these women run, on the order of 5.5% a month. Market women also use the accounts to help cope with unexpected household health shocks, and are better able to maintain inventory levels over shocks than are market women without accounts.

That is from the conclusion of a study by Dupas & Robinson published in American Economic Journal: Applied Economics (January 2013). A draft is here (2010).

The authors conclude:

Overall, our findings suggest that extending basic banking services could have large effects at relatively small cost, especially relative to credit alone.

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. 

Why aren't developed countries saving?

Change of intertemporal preference would not be my first answer. But that is precisely what Dobrescu, Kotlikoff, Motta say in their article (European Economic Review, August 2012), at least for the US:

American and French societies are placing increasing weight on the welfare of those currently alive, particularly contemporaneous older generations. Government spending also appears to be one of the reasons why France is saving at much lower rates.

An early draft is here (2008).  

Basic savings accounts

Recent studies have shown that the majority of the poor lack access to formal banking services of any kind and have emphasized the importance of enabling savings. Using a field experiment I investigate the impact of expanding household access to a savings account with no withdrawal fees on savings and borrowing behavior, assets accumulation, and investment in health and education. A savings account was randomly offered to poor female household heads through local bank-branches in 19 slums in Nepal. Results show that there is untapped demand for savings accounts and that the poor do save: 80% of the individuals offered the account opened one and used it actively, making on average 0.8 deposits per week, and saving about 8% of their weekly income. Access to the savings account increased monetary assets and total assets without causing any crowding out in other kind of assets or savings institutions. Impact is larger for households at the bottom and middle of the assets distribution and for the ones with no access to the financial system, formal or informal. Finally, financial access strongly increased households investment in health and education.

That is the abstract of the new paper "Do basic savings accounts help the poor to save? Evidence from a field experiment in Nepal" by Silvia Prina (March 2012). 

HT: Marc F Bellemare. Marc reports in his blog the frontier of research in development economics.