Perceived Precautionary Savings Motives: Evidence from FinTech

Abstract

We study the consumption response to the introduction of a mobile overdraft facility on a FinTech app. Users react to the availability of the overdraft by increasing their consumption spending permanently and reallocating consumption from nondiscretionary to discretionary goods and services. For identification, we exploit sharp discontinuities in the size of the overdraft limit based on an income rounding rule the app uses to assign credit limits. In the cross section, we find similar responses for young and old users, users with high and low income volatility, and users with steep and flat income paths. The most liquid users—those with high ratios of deposits to income inflows—drive the consumption spending response. These results are not fully consistent with models of financial constraints, buffer stock models with and without durables, present-bias preferences, or the canonical life-cycle permanent income model. We discuss a new channel, the perceived precautionary savings channel, which appears consistent with all our results. Under this channel, households with higher liquid wealth behave as if they faced strong precautionary savings motives even though no observables suggests they should do so.

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