Time-inconsistency, liquidity, and the demand for commitment savings products

• Low savings rates among small businesses are thought to inhibit growth in developing countries. Self-control issues have been proposed as a primary reason for these low savings rates.
• We examined the role of self-control issues (“present-bias”) as a potential driver of financial decision-making and demand for commitment savings products amongst female micro-entrepreneurs in Pakistan.
• We found that self-control issues are most likely not a strong determinant of financial behaviour. Individuals with greater liquidity were less likely to demonstrate present bias.
• NGOs and governments offering commitment savings products should take liquidity constraints into account, including in the timing of offering the products.

Low savings rates and low levels of capital investment among small businesses have long been thought to inhibit growth in developing countries. One of the primary explanations for low savings rates put forward in the literature are self-control issues. These are believed to play a significant role in leading small business owners to divert income into consumption rather than savings and investment (Fafchamps et al., 2014). There has been high demand for savings products with “commitment”-type features when they have been offered to micro-entrepreneurs. However, usage rates and re-adoption rates have often been low.

We interviewed 530 women in the Sarghoda district of Punjab, Pakistan. We gave women a participation fee and found that those women who received this liquidity shock at the time of interview appeared much less likely to suffer from self-control issues in the form of present-bias. Similarly, women who were interviewed after the onset of the harvest showed much less present-bias.

Liquidity constraints and uncertainty about future income therefore seem to be determinants of financial behaviour and willingness to adopt commitment savings products. This suggests that the fact that the poor are often liquidity-constrained can lead economists to mistakenly believe that they have self-control issues.

NGOs, banks, and governments should think twice before offering commitment savings products purely on the basis of overcoming “self-control” problems, as these may be a lot less widespread than originally believed. Instead, more work should be done to understand the role of other possible benefits of commitment savings products, such as reminders to save (Karlan et al., 2016) and overcoming “other-control” issues.

Better savings products might be designed which help alleviate issues of inattention and “other-control” issues but at the same time do not tie up individuals’ liquidity to the extent that they are unable to self-insure against shocks. NGOs and governments should think carefully about the timing of when these products are offered, as take-up is likely to be higher at times when liquidity constraints and uncertainty have been eased, for example after the onset of the harvest.