Michaela Pagel | Professor of finance, Columbia

Does saving cause borrowing?

Abstract: We study whether or not nudging individuals to save more has the unintended consequence of additional borrowing of high-interest unsecured consumer credit. We analyze the effects of a large-scale experiment in which 3.1 million bank customers were nudged to save more via (bi-)weekly SMS and ATM messages. Using Machine Learning methods for causal inference, we build a score to sort individuals according to their predicted treatment effect. We then focus on the individuals in the top quartile of the distribution of predicted treatment effects who have a credit card and were paying interest at baseline. Relative to their control, this group increased their savings by 5.7% on average or 61.84 USD per month. At the same time, we can rule out increases in credit card interest larger than 1.25USD with 95% statistical confidence. We thus estimate that for every additional dollar of savings, individuals incur less than 2 cents in additional borrowing cost. This is a direct test test of the predictions of rational co-holding models, and is an important result to evaluate policy proposals to increase savings via nudges or more forceful measures.