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Explain the credit and savings constraints.

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i) Households may simply be too impatient to save enough. As Deaton (1992) demonstrates, as long as households are suitably keen to consume today rather than waiting until tomorrow, credit constraints can persist. Specifically, Deaton’s notion of impatience flows from the assumption that the rate at which a household discounts future consumption is greater than the interest rate on deposits. In this case, households will prefer to consume the marginal dollar rather than save it for later
ii) Another explanation for the inability to save one’s way out of credit constraints involves risk. Persistent negative shocks can keep wiping out assets and make accumulation all but impossible. In theory, households should still be able to adequately accumulate in the very long term, but in a risky environment this could require an implausibly long horizon.
iii) A final explanation is put forward by Platteau (2000) based on observations of village institutions in Africa. Platteau argued that difficulties in saving may have origins in social arrangements. Consider, for example, informal risk-sharing arrangements based on reciprocal claims such that you agree to help your neighbors and family when they need assistance, and they agree to help you in return. A problem arises, though, when your neighbors and family assert that they are in need and put claims on your surpluses, preventing you from saving for your own personal gain. Their incentives may in fact be to keep you from accumulating since, once you get wealthy enough, your own incentive could be to bow out of the mutual insurance arrangement and to self-insure. In order to keep the arrangement together, your surpluses thus get “taxed” by the community, making it difficult to save over the long term
iv) The poor are too poor to save
v) ROSCAs are not the best inducement to save - the very last recipient of the pot would appear to have no incentive to participate. She can simply save the money on her own, week after week, and in the end be just as well off as she would have been if she had participated in the ROSCA. The last recipient may even be better off on her own, since she would be free from the rigid structure and schedule of the ROSCA rules. Hence, there is no clear economic gain from ROSCA participation for the last recipient
vi) Inaccessibility of organized financial institutions for the poor to save.

Kavungya answered the question on March 26, 2019 at 10:18

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Explain the credit and savings constraints.

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