A behavioral model of simultaneous borrowing and saving

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.

Why Do Poor People Co-Hold Debt and Liquid Savings?

“…First, Morduch (2010), Basu (2009) and Atkinson et al (2013) view co-holding as a consequence of a lack of self-control. 12 Atkinson et al (2013) show that poor households in Guatemala use the discipline of regular loan repayments to make deposits to their fully liquid savings accounts.…”

Two Sides of the Same Rupee? Comparing Demand for Microcredit and Microsaving in a Framed Field Experiment in Rural Pakistan

“… Mullainathan and Shafir () discuss the role of lottery tickets as commitment savings devices – analogously to random ROSCAs. See also Basu (), who provides a theoretical model in which sophisticated time‐inconsistent agents find it welfare‐enhancing both to borrow and to save simultaneously. …”

Positive illusions and the temptation to borrow

“…Our analysis of optimism shares some of the spirit and some of the building blocks of Basu's (2016) analysis of simultaneous borrowing and saving. The results are quite contrary however.…”

“…Two quite recent examples on studying interventions that may stimulate savings from their low levels areAshraf, Karlan, and Yin (2006) andDuflo, Kremer, and Robinson (2011).2 Several authors have contributed to this line of reasoning. Notable contributions that are particularly relevant for our discussion areLoewenstein & Prelec (1992) andLaibson (1996) & Basu (2011, 2014, 2016.…”