Savings

Question 1

Venders take out loans to buy gold (reliable asset).

Why loan, and not use savings?

Answer 1

Vendor lacks the self-discipline to save

Loan enables her buy the gold. A reliable asset that will increase in value overtime.

Question 2

What is this process called

Answer 2

Borrowing to save

Question 3

Why do people convert everyday sums of money into larger lump sums (4)

Answer 3

Life-cycle needs e.g pay for marriage, childbirth, education etc

Buffer stock for emergencies e.g natural disasters, sickness

Business opportunities

Financing durable consumption e.g TV, phone, fridge etc.

Question 4

Recurring problem is a lack of bank accounts

Application: How many people have saving accounts in rural vs urban areas (poor economics dataset)

Answer 4

9% rural
12% urban

Question 5

Reason for lack of bank accounts (3)

Answer 5

Small accounts have large admin costs.

Adverse selection

People themselves don’t trust banks! (Poor esp)

Question 6

So rather than banks, informal insurance exists e.g lending amongst local community

Limits to informal insurance (2)

Answer 6

Moral hazard/Limited commitment - so only insure when know them well

Aggregate shocks (where pooling risk doesn’t work) since the shock impacts everyone. E.g a flood everyone is impacted. (So just for BILATERAL RELATIONSHIPS, NOT A POOL!)

(But good for idiosyncratic risks and good complements for insurance that present basis risk)

Question 7

Issue with formal insurance and credit

Answer 7

Short supply as mentioned due to: adverse selection, costs, Trust

Question 8

Risk mitigating (before shock) vs risk coping (after shock) strategies examples:

Separate in terms of production and consumption

Question 9

Why borrow to save? (3) (like the vendor loan to buy gold

Answer 9

People have difficultly saving (saving is a luxury)

Establish relationship with lender so can access a larger loan in case of emergency

Baland Guurkinger and Mali - people take loans to pretend poor and cannot help friends. (STYLISED FACT IN PART 2-BORROWING AND SAVING COMMON AT SAME TIME)

Question 10

Baland Guurkinger and Mali: another reason why people borrow to save

Answer 10

Found people take loans as a way to pretend they are poor and so cannot help friends in need.