The Economics and Psychology of Long-term Savings and Pensions: A Randomized Experiment Among Low-income Entrepreneurs in Maharashtra, India

Principal Researchers: Profs. Karna Basu (City University of New York) and Shailendra Singh Bisht (IFCAI Business School)
Partner Organization: Mann Deshi Mahila Sahakari Bank

Recent research in behavioral economics and behavioral development economics pays attention to the fact that people might have “time-inconsistent” preferences. There are a number of technical ways to represent time-inconsistency, but in each of these cases individual behavior is characterized by procrastination and temptation. In particular, there is evidence that people are time-inconsistent and sophisticated about their time-inconsistency. In other words, they are aware of their self-control problems and seek ways to curb these tendencies.

In the realm of savings, time-inconsistency shows up as a tendency to under-save (because of one’s own self-control problems or social pressures to share). Under these circumstances, people may well place particular value on commitment savings devices – savings plans that help one to resist future temptations.

A classic commitment savings device is a fixed deposit, or a deposit that penalizes the client for early withdrawal. As a time-inconsistent individual, knowing that I cannot arbitrarily dig into my savings for a specified period can encourage me to save better over time.

Since the MD/UTI pension scheme has a strong flavor of a commitment savings device, this is a natural setting to study the nature and extent of individuals’ demand for commitment (i.e. individuals’ desire to tie their own hands).

The main objective of this research study is to learn more about individual decision-making in the context of long-term savings and to understand what kind of product features and marketing strategy would influence the take up of a long term savings plan and savings pattern. More precisely from an academic perspective, it is to understand:

1. Why do people save (or do not save)?
• Conditional on opening an account, what do deposits and withdrawals look like?
• Does takeup of pensions improve outcomes?
• If not, can we learn to predict who will be better off and who will be hurt?


2. Based on what types of packaging/marketing work better than others, to learn what people’s preferences might be like (i.e. Are people “rational” in the traditional economic sense? Are they time-consistent? Do they engage in mental accounting? Are they influenced by uninformative marketing?).


3. From the practitioner’s perspective, to learn what works. In other words, how should Mann Deshi package and market the product to maximize takeup?


4. (More distant) Conditional on opening an account, what do deposits and withdrawals look like? Does takeup of pensions improve outcomes? If not, can we learn to predict who will be better off and who will be hurt?
   
   CMF Research Associates: Ujjawal