Research Summary

Savings among microentrepreneurs

by Dina D. Pomeranz

Description

Poverty is often characterized not only by low average income, but also by highly variable income and expenditures, and by a lack of access to insurance services that can help smooth consumption. While commitment devices such as defaults and direct deposits from wages have been found to be highly effective in increasing savings, they are not available to the millions of people worldwide who work in the informal sector or as independent entrepreneurs, and who therefore do not have a formal wage bill.

Professor Pomeranz has investigated low-income Chilean microentrepreneurs and found that self-help peer groups can be a highly effective alternative commitment device to encourage savings. Participation in a peer group program increased the number of deposits in formal savings accounts 3.5-fold and almost doubled the average savings balance. A subsequent experiment shows that more than 80 percent of the peer-group effect can be achieved through follow-up by simple text messages. These findings are particularly relevant in light of another study, in which Professor Pomeranz documents that low-income entrepreneurs can effectively use savings accounts for self-insurance and protection against economic shocks.