The Persistent Power of Behavioral Change: Long-Run Impacts of Temporary Savings Subsidies for the Poor

This paper presents the results of a field experiment conducted in rural Kenya to study the long-term impact of short-term interest rate subsidies. The experiment involved providing incentives to save in formal bank accounts. Different levels of promotional interest rates (ranging from 0 to 20%) were randomly assigned to accounts, which expired after 6 months. Key findings include:

• Large short-term incentives to save have long-run implications (observed over a 2.5 year period after the subsidies expire) for the economic lives of low-income, rural Kenyans;
• Individual bank account subsidies increase investment in individually owned assets (small businesses);
• Joint bank account subsidies increase investment in livestock and the home;
• Participants activate different behavioral savings rules in response to the different subsidies, and the effect of these choices is highly persistent.

The paper concludes that subsidies may have helped participants activate new mental accounts for important investment goals, and the specific nature of the mental account might have been mediated by the type of account being subsidized.