In it together: peer information, sorting effects and joint savings contracts for micro-entrepreneurs

Research question

This project seeks to understand the role of peers in promoting savings amongst female micro-entrepreneurs. In particular we ask: does signing up to save as a pair helps individuals to overcome barriers to saving, including self-control and other-control problems? Also, do individuals choose the 'right' kind of savings partners when committing to save together?

In Pakistan, as in many developing countries, peer groups often act as a key resource for financial inclusion. The most salient example is the widespread prevalence of ROSCAs, known in Pakistan as "committees". Aside from their credit features, ROSCAs are arguably
used by many members as a group-based commitment savings device. Indeed, Kast et al. (2012) show in a different context that individuals who save at group meetings achieve vastly higher savings balances than individuals saving in isolation. Peer effects and sorting effects may play an important role in how ROSCAs and other types of savings groups might help overcome behavioural frictions and improve the efficiency of savings decisions (Dupas & Robinson, 2011). Yet very little is known about the exact dynamics of saving in groups, and indeed very little can be cleanly identified in the absence of an experiment.

We develop a novel way to study savings behaviour in a controlled setting, namely a 'lab-in-the-field experiment' with field exposure. Female micro-entrepreneurs are invited to experimental sessions, where we elicit their preferences over partners for a savings activity.
Participants then play the savings activity over a number of days, allowing their time-preferences and real-life income shocks to influence their savings choices (unlike in a typical, single-session experimental setting). However, various features of the design enable us to maintain a similar degree of control to a lab-experiment setting. Different treatment arms allow us to identify the effect of peer characteristics on individual savings, and furthermore whether individuals anticipate such effects and choose the 'right' kind of savings partners.

Policy relevance
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 is thought to be self-control issues, which 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). Authors have also emphasised 'other-control' problems, namely the pressure to redistribute to family and friends (Baland et al., 2011). Indeed, female micro-entrepreneurs in particular have been shown to have high potential demand for illiquid savings products, most likely because they are acutely exposed to such demands (Dupas & Robinson, 2009).


Rachel Cassidy (CSAE, University of Oxford)