Increasing a household’s capacity to save can have significant effects on a range of economic outcomes. In markets with credit constraints, not only are cash savings important for growing wealth; they also provide a buffer during financially rocky times.
In developing countries, however, rural households do not appear to save adequately, says Professor Emily Breza. It’s not an issue of access — in rural India, for example, rural bank branches offer no-frills savings accounts with zero or low minimum balance requirements and no restrictions or fees on withdrawals. Instead, Breza explains, inattention to savings balances can make savers lose sight of their goals, and temptation to spend on discretionary items make saving hard for individuals already living with very little.
Previous research has shown that reminders and commitment devices, such as setting concrete timelines for savings goals, can help overcome these obstacles — evidence that has led many rural banks and policymakers to adopt what’s known as a business correspondents model — agents hired by banks to visit villagers at their homes and collect savings deposits. Building on this concept, Breza, with Arun Chandrasekhar of Stanford, developed a pilot program using peer monitors to help residents in 60 rural villages in Karnataka, India reach their savings goals. They started by going door-to-door looking for volunteers for the program — individuals who were interested in saving or in encouraging a saver by being a peer monitor — finding a total of 1,300 savers and 1,000 monitors to take part.
Savers set six-month savings goals and were then divided into three groups: non-monitored, those with a randomly assigned monitor, and those who chose their monitor from among the volunteers. Monitors might check in casually with their savers — a gentle reminder about saving for a child’s education, for example, while passing each other on a walk to school or seeing each other during temple — or do nothing, though savers knew that the monitor would be informed by the researchers about their progress toward their savings goals. Small monetary incentives were given to monitors if the savers hit their goals.
The researchers found that monitored savers were significantly more likely than non-monitored savers to reach their goals. Those with randomly assigned monitors did the best: they saw an average 38 percent increase in savings balances. Within that group of monitored savers, Breza and her fellow researchers also found that savers with monitors who were more central, or socially important within the network, generated a 20 percent rate of reaching their six-month savings goals, compared to a benchmark of only 7 percent for non-monitored savers. The effect was most pronounced when a peripheral saver was matched with a central monitor.
“This signals just how valuable social network importance is,” Breza says. “People on the outside of the networks were pretty terrible peer monitors. If your monitor was a person who is a hub of information, maybe the town gossip, someone who knows what’s going on in the network, you end up saving a lot more because there is more social pressure to save.”
The fact that randomized monitors also led to more savings than letting participants choose their own monitors indicates that people don’t choose the best monitors for themselves. Breza says there are several potential explanations for this — a saver on the periphery might not feel they have enough social capital to approach a socially important monitor to ask for help, for instance, or the dynamics of the relationship may be changed when an outsider or institution (in this case, the researchers) establishes the monitored relationship instead. But while more research is needed to explain this particular effect, some practical implications from the findings are already clear.
“We already knew that bringing a human element in to bridge the gap between a bank branch and customers in these rural areas — such as in the business correspondent model — is beneficial,” Breza says. “But using peer monitors to take advantage of this rich source of information in the community presents a cost-effective way of motivating savers by using positive social pressure.”
The social network effects could also help inform successful design of micro-finance programs in developing countries. “Activities that encourage more connections within a community or bring people from the edges into the center of the community could have a positive impact on access to informal finance and formal risk sharing,” says Breza, “things that not only give an economic boost first to individuals, but also to entire communities.”
Emily Breza is an assistant professor in the Finance and Economics Division at Columbia Business School.
Read the Research