Berg, Erlend
(2009)
The financial lives of the poor: Theory and evidence from South Africa.
PhD thesis, London School of Economics and Political Science.
Abstract
This thesis studies three aspects of the financial lives of poor people, using theory and empirical analysis of data from South Africa. The first chapter studies the effect of mode of payment on household savings behaviour. Savings have been linked to consumption smoothing, investment and economic growth. A theoretical framework is set up to study four possible mechanisms through which electronic payment may have an effect on savings. Using difference-in-difference estimates around a policy change, it is found that households are more likely to have savings when their grant is paid directly into an account. These findings are mapped back to the theory in an attempt to identify the relevant mechanisms. The second chapter analyses funeral insurance as a distinct form of insurance. Funeral insurance is probably one of the oldest and historically most important forms of insurance, and is still widespread in parts of Africa today. Though funeral insurance is often provided by informal risk-sharing groups, this analysis abstracts from organisational form and asks under what circumstances funeral insurance is preferred to general life insurance. A model is set up in which there is an inter-generational conflict of interest over funeral expenditure, which funeral insurance may resolve. Predictions from the model are consistent with results from empirical analysis. The third chapter investigates an assumption which is nearly ubiquitous in development economics - that of constrained household liquidity. Direct empirical evidence of such constraints is surprisingly scarce. Many observations consistent with liquidity constraints are equally consistent with precautionary saving or a lack of forward planning. Using a South African panel data set and a source of anticipated income, the standard model with perfect capital markets is rejected. Finding that it fails, further analysis attempts to distinguish between liquidity constraints, precautionary saving and myopia as possible explanations.
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