The Importance of Precautionary Motives Relative to Entrepreneurial / Self Enhancing Motives in Driving the Savings Behavior of the Poor in Developing Countries

This project will use theory and a theory-driven randomized microfinance experiment to measure the importance of precautionary motives relative to entrepreneurial/self-financing motives in driving the savings behavior of the poor in developing countries. This question is important because the two motives suggest different predictions for household and macroeconomic responses to savings and credit interventions, or financial deepening more broadly. This Kellogg Institute funding is for the pilot for this project in which the design of the experiment will be tested in Fort Portal, Uganda from June, 2012-December 2012.

This project will develop a parsimonious model of household savings, consumption, and investment in the face of income shocks, entrepreneurial opportunities, and credit constraints. A simple parameterization will allow the researchers to shift motives for saving from buffering income shocks to financing entrepreneurial investments. The model motivates a simple experimental test: Increased access to in-kind investment loans versus cash loans leads to dfferential impacts on households depending on the relative strength of these motives. The two types of loans have similar impacts for self-financing savers (increasing investment, and consumption over time), but only the latter impact precautionary savers (causing short-term increases in consumption).