Essays on Informal Banking by Karna Basu

This thesis is a collection of three theoretical essays that examine the role of time-inconsistent preferences in informal banking. The first two chapters focus on specific banking institutions, while the third studies individual welfare more generally. In Chapter 1, I develop a model of rotating savings and credit associations (roscas) where members are quasi-hyperbolic discounters. I show that, in this setting, roscas function as commitment savings devices, and can survive in equilibrium even in the absence of formal contracting or informal social sanctions. In Chapter 2, I study the behavior of quasi-hyperbolic discounters who have access to credit and a non-secure savings technology. I show that these agents might simultaneously save and borrow to create optimal investment incentives for future selves. Chapter 3 evaluates and compares the welfare outcomes for time-inconsistent agents under several banking environments. Thesis Supervisor: Abhijit Banerjee Title: Ford International Professor of Economics Thesis Supervisor: Xavier Gabaix Title: Dornbusch Career Development Associate Professor Acknowledgements First, I thank my advisors Abhijit Banerjee, Xavier Gabaix, and Sendhil Mullainathan. I am grateful for Sendhil's insistence that I believe my own theories, Xavier's demands for rigor and clarity, and above all, Abhijitda's overarching intellectual guidance. Without them, I would have been unable to turn my penchant for procrastination into a topic of research. I have benefited from conversations with Esther Duflo and Dean Karlan. I also thank Gary King and Katherine Swan for all their help. At MIT, I was exceptionally fortunate to live and work with people who would become close friends. I thank Dan Beary, Thomas Chaney, Daniel Chen, Patricia Cortes, Amulya Gopalakrishnan, Rema Hanna, Geraint Jones, Karthik Muralidharan, Daniel Paravisini, Nancy Qian, Veronica Rappoport, Tali Regev, and Zaki Wahhaj. I must separately thank those most responsible for hours frittered in my final year. They are Raphael Auer, Paula Bustos, Sylvain Chassang, Saugato Datta', Ivan Fernandez-Val, Indradeep Ghosh, Ruben Segura-Cayuela, and Mihir Sharma. And lastly, thanks to Antara Dutta for her support and her company, at home and in school. I thank Shabnam, my ally over many years, for keeping me sane with rationality and love. I cannot overstate my debt to my sister, Diksha, and parents, Alaka and Kaushik, for being my source of comfort, inspiration, and laughter. Finally, I thank my grandmothers, Mani and Mai. Given their unshakeable belief that my thesis is a masterpiece, it is only natural that I dedicate this work to them. The process of preparing the thesis for the final print is somewhat complicated, especially when one is halfway across the world. This could not have been done without Saugato's help.