Ph.D. Economics, Massachusetts Institute of Technology, 2006
Fields: Development Economics, Behavioral Economics, Applied Microeconomic Theory
Office: HW 1541
Professor Basu joined Hunter College in 2009. He was a postdoctoral fellow at the University of Chicago from 2006 to 2009. He works on topics at the intersection of behavioral economics and development, with a particular focus on informal banking.
For links to papers, please visit my personal web page.
“Hyperbolic Discounting and the Sustainability of Rotational Savings Arrangements”
American Economic Journal: Microeconomics, 2011, 3(4): 143–71
People across the developing world join rotational savings and credit associations (roscas) to fund repeated purchases of nondivisible goods. When the scope for punishment is weak, there is a natural question about why agents not defect from roscas. This paper models roscas as commitment savings devices and derives conditions under which hyperbolic discounters will never defect, even in the absence of formal contracting, social punishment, and reputation. I show why, unlike with standard commitment devices, a hyperbolic discounter will not postpone entry into a rosca. Finally, this paper makes predictions about the relative survival of random and fixed roscas.
Submitted & Working Papers
“Evaluating Seasonal Food Security Programs in East Indonesia” (with Maisy Wong)
Food programs are large and expensive components of social safety nets in developing countries. For agricultural households, hunger is more acute in annual lean seasons, but food policies typically do not adapt to seasonality. There is limited research on this because of a paucity of panel data that tracks households across seasons. In this paper, we analyze consumption and income seasonality in East Indonesia. We design a unique seasonal household panel, develop a model to explain how credit and saving constraints generate seasonality, and present results from a randomized experiment of food storage and food credit. In both programs, economic well-being increased substantially (a one standard deviation increase). Under credit, participants report a reduction in both seasonal consumption gaps and food shortage, health improvements when credit is disbursed but deterioration when repayments are due. Under storage, households with a high propensity to save report a strong reduction in food shortages.
“Commitment Savings in Informal Banking Markets”
I study the provision of commitment savings by informal banks to sophisticated hyperbolic discounters. Since a consumer is subject to temptation in the period that he signs a contract, banks might exploit his desire for instant gratification even as they help him to commit for the future. Without banking, savings decisions and welfare are not monotonic in the degree of time-inconsistency. Consequently, commitment savings will lower welfare for moderately time-inconsistent agents. If loan contracts are enforceable, pure commitment savings will disappear. This will further lower welfare if the lender is a profit-maximizing bank, but raise welfare if the lender is a welfare-maximizing NGO. Finally, I consider the coexistence of a bank and NGO. There will be zero takeup of NGO-provided commitment savings if there is competition from a moneylender. But the NGO’s offer will raise welfare by forcing the moneylender to lower repayment rates.
“Renegotiating with One’s Self”
This paper describes a hyperbolic discounter who is fully aware of her time-inconsistency but might make mistakes over equilibrium selection. The semi-sophisticate fails to anticipate future renegotiation of subgame perfect equilibria, while the full-sophisticate follows a renegotiation-proof equilibrium. I examine behavior when an individual must decide whether to purchase a good with immediate costs and deferred benefits. When faced with a deadline, a semi-sophisticate will behave like a sophisticated hyperbolic discounter, but without a deadline (when she faces multiple equilibria), she will appear naive. A welfare-maximizing government will offer the good only intermittently, for semi-sophisticates and possibly full-sophisticates. Monopoly might generate higher consumer surplus than competition, since a monopolist can commit to a pattern of sale and non-sale prices, thus effectively creating deadlines. If the individual is a Bayesian updater with inaccurate initial beliefs about her type, she will ultimately switch to a renegotiation-proof equilibrium with particular properties.
“A Behavioral Model of Simultaneous Borrowing and Saving”
Why do individuals borrow and save money at the same time? I present a model in which sophisticated time-inconsistent agents, when faced with a future investment opportunity, rationally choose to save their wealth and then borrow to fund the investment. The combination of savings and a loan generates incentives for future selves to invest optimally by punishing over-consumption. This paper contains two main results. First, I show that agents who simultaneously save and borrow can have higher lifetime welfare than those who don’t. Second, I show that agents who have access to a non-secure savings technology can be better off than those who only have access to secure savings.
“Seasonal Food Consumption in West Timor” (with Maisy Wong)
Seasonality is a basic fact of agrarian life in many developing countries. In this paper, we complement the literature on consumption smoothing by focusing on the less-studied problem of smoothing between seasons within an agricultural cycle. We present a novel model that relates seasonality in consumption to exponential and quasi-hyperbolic time preferences. The model identifies two crucial parameters for consumption patterns – discount factors and crop depreciation rates. Motivated by the model, we collected a unique dataset that combined time preference measures with detailed consumption and production information of more than 2000 households in Eastern Indonesia. We relate the model to the data and find suggestive evidence that both time preferences and crop depreciation rates play a role in the seasonality of consumption patterns. Based on these findings, we propose simple solutions that will be tested in future research.
Papers in Progress
“Time Inconsistency and Firm Ownership” (with Jonathan Conning)
“Inferring Time Preferences from Survey Data in Indonesia” (with Maisy Wong)
“Pension Savings for Low-Income Households in India” (with Shailendra Bisht)