Saving by default: Evidence from a field experiment in rural India

A growing share of the world population has been offered access to formal bank accounts. In many developing countries, this allows a move from cash transfers to account based payments. Grounding our hypothesis in behavioral economics, we conjecture that being paid on an account instead of in cash can play a major role in encouraging account savings. When people are paid on the account, the money is saved by default. On the other hand, when they are paid in cash, the money is ready to be spent. To formally test our hypothesis, we sampled 442 villagers in rural India, who either had an account, or were asked to open one. They received weekly payments of Rs 150 for about 10 consecutive weeks. We randomly allocated them to being paid on the account (treated) or in cash (control). There is no cost of depositing/withdrawing, but it takes a few minutes. Our main result is that treatment increased the account balance by around 110 percent, and that the effect is long lasting. Indeed, five months after the last payment, the account balance of the treated was still twice as high as the balance of the control. Our finding is perfectly consistent with procrastination to save and inertia. We exclude two alternative mechanisms that could have been at work. First, using lab in the field games, we show that the treatment did not affect the trust and empathy between the clients and their banker. Second, we provide evidence against the treated having developed an active savings habit on the account, by showing that - once everyone is paid in cash - the treated and control behave in a similar manner. Our results have important policy implications, as we show that moving from cash transfers to account based payments, triggers the active usage of formal bank accounts, and can therefore facilitate one's finances.