Munich Personal RePEc Archive

A behavioral model of simultaneous borrowing and saving

Basu, Karna (2009): A behavioral model of simultaneous borrowing and saving.

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Abstract

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.

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