A behavioral model of simultaneous borrowing and saving

Abstract

Why do individuals borrow and save at the same time? This paper proposes a new explanation in settings where savings are not secure. A sophisticated hyperbolic discounter who foresees an investment opportunity would like to ensure that her future self has both the liquid cash and the incentives necessary to invest. I derive conditions under which she will rationally choose to save while borrowing to fund the investment. The combination of non-secure savings and a loan serves as a commitment device that generates self-inflicted punishments for non-investment. I argue that this model is particularly applicable to, but not limited to, microfinance and informal banking.

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