Working Paper | HBS Working Paper Series | 2014

Saving More to Borrow Less: Experimental Evidence from Access to Formal Savings Accounts in Chile

by Felipe Kast and Dina Pomeranz

Abstract

Poverty is often characterized not only by low and unstable income, but also by heavy debt burdens. We find that reducing barriers to saving through access to free savings accounts decreases participants' short-term debt by about 20%. In addition, participants who experience an economic shock have less need to reduce consumption, and subjective well-being improves significantly. Precautionary savings and credit therefore act as substitutes in providing self-insurance, and participants prefer borrowing less when a free formal savings account is available. Take-up patterns suggest that requests by others for participants to share their resources may be a key obstacle to saving.

Keywords: Saving; Poverty; Borrowing and Debt; Chile;

Citation:

Kast, Felipe, and Dina Pomeranz. "Saving More to Borrow Less: Experimental Evidence from Access to Formal Savings Accounts in Chile." NBER Working Paper Series, No. 20239, June 2014. (Revised June 2014. Featured by La Tercera. Harvard Business School Working Paper, No. 14-001, July 2013)