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Project Description

Picture: courtesy of A. Avdeenko / A. Bohne

Background 

We partnered with a local microfinance institution and Mekelle University in Ethiopia to design and conduct a randomized controlled trial to test new saving products for farmers. In this area of the country, the majority of the population consists of smallholder farmers. These smallholder farmers are exposed to high levels of income volatility due to the agricultural cycle: they have high income in the harvest season and low income for the rest of the year. Household savings are therefore crucial to overcome financial hardships at some periods of the year and to enable farmers to make necessary investments in land and agriculture or other areas. Increased savings has been shown to improve a range of development outcomes (Karlan, Ratan and Zinman 2014). Previous research has found a number of reasons why people may be prevented from achieving their optimal savings level, many of them motivated by results from behavioral economics such as time-inconsistent preferences.

Evaluation 

The savings innovation takes into account the farmers’ agricultural and cash flow cycles, and seeks to nudge them to save some of their income for further investments. In collaboration with local partners, moneyboxes were randomly distributed to rural households, along with individually-tailored savings plans. Moreover, the participants were given specific recommendations regarding their savings goal amount. The aim of this project was to test for alternative barriers to savings, especially over- and under-confidence, and to see how they can be overcome using a simple and effective savings technology.