| The importance of social constraints on savings and accumulation in low-income countries has been neglected. In Sub-Saharan African communities, poverty and inadequate access to basic social goods lead households to use informal mutual assistance schemes to cope with economic shocks. We focus on "vertical assistance" schemes where middle income households commit themselves to assist extended family members to meet basic needs. However, inefficiencies arise because of adverse selection and moral hazard. As they develop a reputation as "providers", households holding observable liquid assets become overwhelmed with relentless social spending requests from community members. These requests are difficult to screen but also difficult to refuse because of social solidarity rules. As a consequence, to safeguard savings against competing social claims, middle-income households develop illiquidity preference: they substitute "social spending hedges" for monetary assets.; We develop a three-period theoretical model of household investment and illiquidity preference to show how this social tax interacts with inflation to weaken the propensity to invest in productive capital. Further simulations using dynamic programming techniques illustrate how inflation, social taxes, lumpiness in physical capital, and the limited availability of suitable longer-term financial assets, reduce productive accumulation in favor of irreversible social hedges of low quality.; From a micro econometric analysis of a large sample of African household expenditures, we then generate empirical estimates of how social spending shocks reduce the likelihood and amount of investment, more so for middle and stable wage income earners. From cross-country data at the macroeconomic level, we then confirm econometrically weaker-than-expected complementarity between cash and physical capital.; Our investigation highlights the need to build financial institutions to provide both basic social insurance and high-yield deposits that better meet the needs of households and small-scale entrepreneurs in Africa. |
