Piggy Banks: Financial Intermediaries as a Commitment to Save
24 Pages Posted: 28 Jan 1999
Date Written: November 1998
Savers with uncertain life spans cannot stick to long-term investment plans when they invest directly in liquid assets. Before horizons are known, all savers will plan to roll over their short-term assets if returns turn out high. Ex post, the short-term investors will consume their liquid assets rather than reinvest them. Delegating investment decisions to an intermediary reduces the commitment problem, and leads to more efficient portfolios. The higher return to savings should also increase savings rates.
JEL Classification: G21, G23, E21
Suggested Citation: Suggested Citation