Policy Issue:
Without a system for managing finances, small businesses may miss opportunities to increase profits and trim expenses. In particular, entrepreneurs in developing countries who rely on informal businesses to meet basic consumption needs may benefit from formal record keeping systems. Many of these entrepreneurs, often with little formal education and low levels of financial literacy, do not maintain records of business expenses or sales. Providing small business owners with tools to manage their finances may be a way to improve both business outcomes and household consumption levels.
Why are some entrepreneurs perpetually in debt? Around the world, individuals pay high interest rates to moneylenders or microfinance institutions in order to finance their working capital. In many cases, however, the enterprises are not growing. It is unclear why these businesses need financing, and why these entrepreneurs are unable to save sufficiently from their own income to finance their businesses. In this study, we study the characteristics of vendors who repeatedly fall into debt.
Surveys on financial knowledge and behavior have revealed that individuals in both developed and developing countries around the world lack adequate knowledge to make informed financial decisions. Empirical evidence demonstrating correlations between financial literacy and various measures of well-being has directed service providers, donors, and policymakers to include financial training and business education programs as part of broader anti-poverty strategies. Financial education, especially when provided in early life stages, has the potential to create long lasting impacts. Intuitively, provision of education in financial skills offers useful tools to persons of all ages facing distinct economic challenges, yet evidence of impact is thin and mixed. This project seeks to identify an effective program curriculum and delivery for financial education for primary schools students. Specifically, it will measure the impact of financial education on students’ behaviors and attitudes and will allow future research to determine if this early education has a bearing on future financial decision making.
This project will evaluate the effectiveness of financial education and commitment contracts in promoting higher levels of saving, reduced reliance on credit card debt and healthier financial portfolios among low-income individuals in the United States. U.S. households in the bottom quartile of wealth spend, on average, more than they earn, and many low-income consumers lack formal savings accounts. Consumers tend to have time-inconsistent preferences for savings and consumption; they tend to be more impatient in the near-term than in the long-term and thus have a propensity to make purchases that are later regretted. This project will evaluate the impact of commitment devices as a mechanism for mitigating time-inconsistent tendencies in spending, borrowing and saving.
Policy Issue:
Microcredit is often offered in conjunction with client education services, to provide training for clients through the existing infrastructure. Karlan and Valdivia (2008) found that business training for microfinance clients improved business knowledge, practices and revenues for beneficiaries and increased repayment and client retention rates for the institution. Financial literacy is another educational topic that may be effective in improving economic conditions of clients and financial conditions for lenders. By offering financial trainings with credit, microfinance institutions may help clients to better manage their loan repayment and avoid overindebtedness. Microfinance institutions may minimize educational costs and improve outreach of the model by using information and communication technologies (ICTs) such as radio and television.
The study is designed as a survey with an embedded experiment and took advantage of Mexico's privatized social security system, which requires workers to choose their retirement investment funds (AFOREs) from an approved list. This research project will collect detailed survey data and implement a series of field experiments in order to further understand the factors that determine workers' investment choices. The survey will collect information on financial planning, financial literacy, and investor perceptions of the privatized social security market.
Previous research suggests that many people lack the skills needed to calculate expected returns or present discounted values, which may cause them to make suboptimal financial decisions. Previous work by Hastings and Tejeda-Ashton in Mexico showed that the way that returns to a pension program were presented (in pesos versus as an annual percentage) affected price sensitivity. Another explanation offered for sub optimal financial decisions is the present bias of many decision makers, who are impatient and consistently choose immediate gratification instead of a more measured approach that allows for optimal saving for future consumption.
This project will evaluate the impact of commitment contracts and reminder messaging on savings behaviors among low- and medium-income credit union members in Washington DC. Traditional financial products which dominate the consumer finance market tend to operate under the assumption that consumers act in a rational manner and fail to take into account cognitive biases which can impede the realization of financial goals. Here we test a savings product that includes two features designed to overcome these biases. A built-in commitment contract attempts to encourage consumers to forego present expenditures in lieu of future payoffs. Regular messaging attempts to overcome limited attention, which may result in an inability to stick to a budget or savings plan.
Many argue that increased financial literacy among poor households would increase usage of financial products and savings products in particular - however, this raises an immediate question: if financial literacy increases take-up of savings products, why don’t banks and MFI’s include financial literacy materials in their advertising?
Policy Issue:
Many argue that increasing financial literacy among poor households would increase usage of financial products, and savings products in particular. However, this theory raises an immediate question: if financial literacy increases take-up of savings products, why don’t banks and microfinance institutions include financial literacy materials in their advertising? One explanation for this relative lack of “informational advertising” or use of financial literacy materials is that banks cannot capture all of the increase in savings product use from the advertising (i.e. there are spillovers). The informative advertising may make customers more likely to use savings products in general from any firm, thus the bank conducting the marketing may not benefit. Another method, referred to as “persuasive advertising” that tries to convince the customer that a particular firm is superior may be a more effective means of promoting a particular bank’s products. This study assesses the impact of both informative and persuasive advertising to better understand the role of financial literacy in savings product take-up.
IPA is working with Mumuadu Rural Bank (MRB) to study the response to and impact of a new account labeling savings product. Working with Susu customers and Susu agents, the study compares the success of this new product with the current Susu savings product. The new savings product has only a psychological difference: it allows the labeling of funds within an account so that deposits can be directed to a specific goal, such as health, education or business savings.
Watch Project Associate Hana Freymiller talk about this project on Youtube.
