Working Paper | HBS Working Paper Series | 2013

Do Savings Constraints Lead to Indebtedness? 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 the inability to save contributes to this indebtedness. Access to free savings accounts substantially decreases participants' propensity to use short-term credit. 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 saving more when given the choice. Take-up patterns suggest that requests by others for participants to share their resources are a key obstacle to saving.

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

Citation:

Kast, Felipe, and Dina Pomeranz. "Do Savings Constraints Lead to Indebtedness? Experimental Evidence from Access to Formal Savings Accounts in Chile." Harvard Business School Working Paper, No. 14-001, July 2013.