Abstract
Present bias, or the overvaluation of an immediate payoff, causes under-saving and financial difficulty. We investigate whether married couples utilize their spouses as a savings commitment device to alleviate the present bias problem using experimental and survey data in Vietnam. We find that individuals are less present biased when making joint decisions with their spouses than they are when making decisions alone. However, present-biased individuals turn over a smaller ratio of their earnings to their spouses and are more likely to manage household resources than time-consistent individuals are. Present-biased individuals also receive larger amounts of money from their spouses’ incomes, indicating that marriage not only fails to function as a savings commitment device but also exacerbates the problem. Married couples whose joint decisions are not present biased try to alleviate this problem by allocating smaller allowances to present-biased spouses, but the present-biased spouses conceal money to counteract this strategy. Our study indicates the importance of external savings commitment devices in helping people protect money from their present-biased spouses.
Highlights
Empirical evidence suggests that people do not save as much as they think they should [1, 2]
We find that wives with presentbiased husbands are more likely to participate in rotating savings and credit associations (ROSCAs), which is consistent with a previous study in Kenya finding that wives use ROSCAs to protect money from their husbands [10]
Our study indicates the importance of savings commitment institutions, such as ROSCAs and savings accounts, that function outside of households and, enable spouses to protect their finances from present-biased partners
Summary
Empirical evidence suggests that people do not save as much as they think they should [1, 2]. Yi 1⁄4 >>>: yi 1 if 0 < yi < 1 ; if yi 1 where yi is the share of earnings of individual i turned over to his/her spouse, y i is the latent variable, wi is a row vector of present bias variables, xi is a row vector of other observable controls that affect intrahousehold decision-making (i.e., gender; the time discount factor; differences in age, education, earnings, own assets, own inherited assets, arithmetic score, and financial literacy score; and years of marriage, which captures trust between spouses), and the column vectors, θ and γ, are parameters to be estimated.
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