Abstract
Financial products and transfer schemes are typically designed to improve welfare by helping individuals follow through on their intertemporal plans. We implement an artefactual field experiment in Malawi to test the ability of households to manage a cash windfall by varying whether 474 households receive a payment in cash or through direct deposit into pre-established accounts at a local bank. Payments are made immediately, with one day delay, or with eight days delay. Defaulting the payments into savings accounts leads to higher net deposits into bank accounts, an effect that persists for a number of weeks afterwards. However, neither savings defaults nor payment delays affect the amount or composition of spending, suggesting that households manage cash effectively without the use of formal financial products.
Highlights
According to standard neoclassical theory, agents should be indifferent to the timing and modality of an expected windfall
The experiment equated the transaction costs of accessing the transfer and to either saving or dis-saving. This is most obvious for those who received their transfers on the day they visited the bank, but we argue it is true for those receiving transfers with one- or eight-day delays
Because deposits increase for the cash recipients, the initial effect of the savings default is significant after seven days but not after 14 days
Summary
According to standard neoclassical theory, agents should be indifferent to the timing and modality of an expected windfall. Banerjee & Mullainathan (2010) develop a framework in which the poor are more susceptible to temptation spending than the rich In their model, savings defaults or payment delays have the potential to arrest the temptation spending that would arise from windfall income received during the lean season. Unplanned expenditures account for less than five percent of total spending, and are not different between the cash and direct deposit recipients Compared to those who do not receive large transfers, recipients do not spend all cash on hand: after two weeks, 85% of the amount transferred is not in the bank, but only 60% has been spent.
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