GROUP A

Gabriela Takemiche
Ramiro Sanchez
Claudia Cerquera
Zamir Alvarez
Nicolas Martinez

EXAM 2 BEHAVIORAL ECONOMICS

1. What is the research question or phenomena you will explore? What in particular (in the
real world) motivates you to be interested in this question? Where does its behavioral
motivation come from? (i.e., specific motivation from something you learned in week 1.
It is useful to include references where applicable.)
Our experiment will explore the financial education that we can give to the most vulnerable and the
poorest population in the city of Bogot, we were motivated by this topic because we saw that these
people dont usually choose the right choice when we talk about a microcredit, they prefer on asking
for a Gota a Gota credit, than going for a credit bank. So, why they choose the Gota a Gota credit
even when they know is not the right choice? We were looking for the answer on this question and we
found that somehow most of this people dont have the enough information about a credit bank, they
prefer on asking for money to some guy and paying day by day, what they dont know is that the
interest rate in Gota a Gota are much higher than the interest rate in a credit bank, so we made a
small example how these interest rates are different, our behavioral motivation is that people tend to
overestimate long term interest vs short term interest leading them to make choices that are not
completely rational choosing Gota a Gota as a valid way of microcredit even do it is an informal and
illegal method and also a more expensive way of microfinance, on top of this we dont think we took
and an special approach in this course but many of people choice is at the end taking into account by
their beliefs that banks are more expensive and by joining them they will be eventually end drowned
in debt, so the choose the Gota a Gota system, proving that this is indeed a matter that must not be
only analyzed in economic terms but also in psychological way, during our first week of the course
that economic agents do not take always the more rational outcome and phycology must be included
to try to determine what moves peoples behavior when approaching decision. To show evidence of
this scenario we included a small demonstration:

Gota a Gota stage

Amount of the loan: $ 3.000.000
Monthly interest rate expired: 5%
Monthly interest rate fixed: $150.000

Month Inicial Loan Interest Money Inicial Loan Monthly Fee Final Debt
0 $ - $ - $ - $ - $ 3.000.000
1 $ 3.000.000 $ 150.000 $ 500.000 $ 650.000 $ 2.500.000
2 $ 2.500.000 $ 150.000 $ 500.000 $ 650.000 $ 2.000.000
3 $ 2.000.000 $ 150.000 $ 500.000 $ 650.000 $ 1.500.000
4 $ 1.500.000 $ 150.000 $ 500.000 $ 650.000 $ 1.000.000
5 $ 1.000.000 $ 150.000 $ 500.000 $ 650.000 $ 500.000
6 $ 500.000 $ 150.000 $ 500.000 $ 650.000 $ -
 Total interest $ 900.000

Financial traditional market stage:

Amount of the loan: $ 3.000.000
Interest rate EA: 35,42%
Monthly interest rate expired:2,559%

Month Inicial Loan Interest Money Inicial Loan Monthly Fee Final Debt
0 $ - $ - $ - $ - $ 3.000.000
1 $ 3.000.000 $ 76.770 $ 500.000 $ 576.770 $ 2.500.000
2 $ 2.500.000 $ 63.975 $ 500.000 $ 576.770 $ 2.000.000
3 $ 2.000.000 $ 51.180 $ 500.000 $ 576.770 $ 1.499.999
4 $ 1.499.999 $ 38.385 $ 500.000 $ 576.770 $ 999.999
5 $ 999.999 $ 25.590 $ 500.000 $ 576.770 $ 499.999
6 $ 499.999 $ 12.795 $ 500.000 $ 576.770 $ (0)
Total interest $ 268.695

2. What other (experimental) work has been done in this area? Are you able to find any
papers that look at something similar? If yes, choose two of them and write a short
summary of each describing what they do, and how your experiment will be slightly
different. If no, describe the process you undertook to find related work (where you
looked) and instead write a short summary of the closest motivating paper or reading
that relates to your question.

- Kirkpatrick y Maimbo (2002), they suggest that in the long term, there has been a discussion
over the benefits that can bring having access to financial services for the poorest families.
There have also been doubts about which would be the most adequate institution and
distribution services. In this article they mention that this institutions should be classified in
three groups, focusing only on two (i. formal institutions, subject to the country bank laws ii.
Semi-formal institutions, which are mostly for ONGs or banks with a special letter). This
movement, which has been implemented in several countries, has the following three stages:
o Agriculture subsidized credit era:
Formal institutions, which were mainly located inside the public sector, were the
principal suppliers of financial services to the poorest (in that time the assumption with
which the government would sustain this was that poverty could be overcome by rising
the productivity through the access to credits to small farmers). Provided this, the
companies would give credits without guarantees with low interest rates. This created
problems such as corruption, arbitrariness, limits on the interest rates and others, which
led to these institutions to fail in giving the service to people. Government financial
institutions subsidized these financial services and showed not to be sustainable, so
they were abandoned after loosing political support.
 Micro-entrepreneurs era:
New ideas to achieve the finance of poverty were called microfinances. This began through
banks with a special legal structure (example, Gramen Bank in Bangladesh, Sol Bank in
Bolivia, Women World Bank WW Bank in Colombia). Their goal was to lend small amounts to
groups or individuals (with basic credit techniques and a variety of paying incentives). These
institutions were concentrated in lending small amounts to groups and individuals, using very
basic credit techniques and a variety of mechanisms to incentive payment. The concept that
prevailed in these organizations was that despite not having collateral, the poor were able to
repay the loans if the right incentives were given to them, such as access to additional credits
in a specific date. The opportunity of these loans and the consistency of the availability of credit
were considered more important for the borrower than the interest rate they were paying.
(McGuire et al., 1998; Berenbach &Churchill, 1997). Kirkpatrick y Maimbo (2002).

Of the papers found we take as common topic the fact that there is a strong belief that
microcredit may empower the poor people, and show what are possible policy ideas that didnt
seem to get quite the results they were looking after but indeed show important results, this
studies differ from the fact that neither of them took a behavioral approach as we saw in our
course, most of the papers found online often look to seek whether if being in touch with
microfinance leads to an improvement in lifestyle of poor people, but what we are looking with
our experiment is to try to see why people take Gota a Gota system instead of the banking
system, as we think that the overall outcome will be greater if people use a formal and
supervised system by government entities and not a shady system that operates with no
supervision whatsoever.

3. What will be the proposed context for your experiment? What will be the potential
experimental population? How many subjects could potentially be available to you?
Does this seem like enough? What would be the challenges in gaining access to and
recruiting subjects? (i.e., if you want to do an experiment on preschoolers in Bogot,
how many of those are there? Or if you want to experiment with street market sellers in
New York, again how many do you think there are of these? What would be the
difficulties in enrolling your particular subjects into an experiment?)

The goal for our study its to evaluate the residents of the different localities in Bogot, and we are
going to try to estimate the effect between the financial education and the behavior of people whether
choosing to incorporate to the banking system or to continue with the Gota a Gota credit, in this way
we may foresee any policy change to make people shift from Gota a Gota system which is way
more expensive and have several other social problems involved since it is and illegal and informal
way of banking that usually generate increasing in crime and violence in areas where it is present, by
this we hope to try to reduce the extreme poverty inside the poorest localities in Bogota, we divide the
experiment in three sections:

As the idea of this experiment is to see how poor people make their choosing between the two
systems, we will be applying the experiment in the localities that we consider have high amount of
people put of the banking system and apply to Gota a Gota system.
So we decided to choose over the more heterogeneous localities in Bogota that suffer from low
income and consist of social stratification between 2 and 3. We decide to choose (Rafael Uribe Uribe,
Suba
, Kennedy and Ciudad Bolivar). The population for each locality goes by this and also we decided to
included the % of people in age of working as it might gives an idea of how many people may have
the capacity to go for credit.
Suba: 1,250,734 people and 82%.*
Ciudad Bolivar: 719,700 and 77.1%.*
Rafael Uribe Uribe: 353,761 and 80.9%.*
Kennedy:1,187,315 and 81.2%.*
*Previous data was extracted from Proyecciones de Poblacion por Localidades para Bogota
2016-2020.

For us it seems like a very large population, so we decided that each localitie must be divided in
sector and ally to this sectors social programs to inform people about microcredit, create with local
and work with ediles to make meetings in each sector about microcredit and give them a glimpse of
the potential benefits of going to enroll in banks and from this point notice people actions and if the
increase is more that localities where we are not planning to give them any information about
microcredit of the banking system. We think it will be particular hard to achieve people to enroll in this,
because of two major reason this programs may require a good amount of time that many people
from this depressed areas dont afford most of them work full 8 hours in the week and many in
Saturdays so expecting people take their Sunday free time to go and receive this information is hard,
and most of women that do spend time t home may not have the bargain power in the households to
make their husband listen to bank enrollment plus the fact that Gota a Gota is lucrative business for
criminal groups and perhaps they might not appreciate the idea of people learning new ways that
differ from Gota a Gota.

4. What would be the quantity estimated from this study? That is, interpret the effect you
would estimate. I.e., An increase of [X] causes the average person in population [J] to
increase [Y] by [B amount]. What do you think might be a reasonable range of effects for
your intervention/treatment? Speculation here is ok.

We did a randomly study for cluster, so this way we will try to reduce the problems of bias selection or
for externalities. We are going to do a few surveys to people that have age of 19 or older inside the 6
localities of Bogot that we choose previously.

We will do a random selection between localities and social economics status inside Bogota
(We wont have in count the localities that have less than 500 habitants) for this we will have 6
localities in total.
We will choose 4 neighborhoods between the localities
We will take different zones (church, foundations, etc) this will help us to select people by
clusters. Inside the control group we will have 55 people to have significant results and to have
intern validity
After this we will do a test Difference-in-Difference so this way we can have the measure of the
effects in the study:
- A is going to be the people that are in the treatment group but the results are the ones we have
before the treatment
- B is going to be the people that are in the control group but the results are the ones we have
before the treatment
- C is going to be the people that are in the treatment group but the results are the ones we have
after the treatment
- D is going to be the people that are in the control group but the results are the ones we have
after the treatment

So, the Difference-in-Difference estimator will be:

[C-D] - [A-B]
[% of the treatment group after the experiment] [% of the control group after the experiment]
[% of the treatment group before the experiment] [% of the control group before the
experiment]
We thought that after reading others papers about financial education, and reading their results, we
might think that the results inside the groups are going to be significant relevant, given that after this
people that are inside the treatment group will have an extra knowledge on financial education and
how they can use and have microcredits and this way they can increase a bit their income.

5. Would you experimental analysis gives any insight for policy? If so, what would it be?

We think that our experiment may give the government the proper knowledge of how people make
their choice between the banking system and the Gota a Gota, having this informationis an
important tool to create policy and make them chose a better system plus also removing the Gota a
Gota and all its downfalls. The credit institutions could make more available the instruments for
financial education to kids and Young adults and a good policy in my opinion could be making some
kind of Alliance between the financial institutions and the High Schools and Universities in Colombia
that gives the people of the localities the assurance that this is investigated by the academy and
sense a more compelling argument in choosing to enroll and enter the financial sector, plus giving
future generations a glimpse of the financial sector when they are in the age of choosing the may be
better informed that what they parents where 10 years ago. Even studying Economy, only few people
knows about financial education, how to borrow and at what interest rate. Microcredits institutions
have to be capable to teach on how people should work to be able to ask for a credit. When people
ask for credit it is a way to get a better economy and the government should apply policies that help
the people that is starting a business to be capable of paying a credit loan. Many little borrows that
are outside of the financial market have too much interest rate and this will lead that people could not
pay the credit. All this in conjunction may give these localities away to be more productive within
showing improvements in other social aspects in their neighborhoods.

6. What might be the criticisms of your proposed study? Remember, no study is ever
perfect or free from criticisms. What might be some that pertain to your study? What
would be interesting improvements or extensions of the idea?

The model could present a variety of problems or inconsistencies and these criticisms could be built
within the main can be highlighted; Nothing speaks concerning the type of surveys to be made so that
such form respondents tell the whole truth people answers may be biased by the fact that we are
asking for preference and this as we saw in the course are no strictly rational all the time, another
problem may be that we may not reach and important amount of households so the data we may
collect may not be enough to make the proper conclusions. Another criticism may be the way in which
these into account be handled with due time and if people will be selected regardless of whether
these form a traditional family or not, it means, single people may be more nomadic and tend to move
from one place to another so we may face a problem of attrition since Bogota landscape is changing
in fast way people may get changes from localities to localities from time to time in this way we may
experience mixing between control and treatment groups, with effects that may alter our real study.
The other criticism is related to the previous one and is known as if neighborhoods are so close we do
to isolate the effects of financial education. Not all models are perfect and do not claim that this is the
exception and could find many more critical, but the important thing is to throw an overview to help us
understand this precise case that motivates people to go for Gota a Gota system and which policy
can government entities create to reduce this numbers or perhaps the solution may be to star to
regulate this market.