Vincent Somville, CMI: Saving by Default: Evidence from a Field Experiment in Rural India
ESOP seminar. Vincent Somville is a senior researcher at the Christian Michelsen Institute (CMI). He will present a paper entitled "Saving by Default: Evidence from a Field Experiment in Rural India", written jointly with Lore Vandewalle.
Vincent Somville. Photo: CMI
We document that the method of payment - in cash or on a bank account - is an important determinant of savings behavior. In rural India, we conducted the first randomized control trial that studies the effect on savings of allocating identical weekly payments on a bank account (treated) or in cash (control). The villagers are free to deposit or withdraw the amount they want, the transaction costs are negligible, and the bank is located at their doorstep. The impact of introducing transfers on a bank account is huge: savings on the account increase by 111 percent within three months of weekly payments, and the effect is long-lasting. Villagers paid in cash do not save more in other assets such as cash at home, but they increase consumption. Therefore, we infer that being paid on a bank account has a net positive impact on total savings. Next, we discuss the underlying mechanism that drives the observed change in savings behavior. We provide evidence that the treatment difference reflects a default effect. Indeed, once we twist the original design and pay everyone in cash, the saving and consumption patterns of the treated and control no longer differ. Finally, data obtained through a lab-in-the-field experiment suggests that the increase in savings is not driven by improved trust towards the banker.
Host: Kalle Moene