The Corona Virus or COVID-19 pandemic has undoubtedly given rise to a massive global health and economic shock, and has impacted the world in countless ways. The world, especially developing countries, will definitely endure continued sharper negative trade-offs and stiffer constraints. Already, we are witnessing massive disruptions of markets and institutions, with social protection avenues not spared. The pandemic, it is assumed, will in the mid-long term put an enormous strain on poorer countries’ systems, especially given that most of the poor countries have limited capacity to cushion the pandemic, are highly indebted¹, face tight fiscal and monetary constraints, and have not adequately invested in robust social protection and anti-poverty programs. Indeed, COVID-19 poses considerable risks to already vulnerable populations living in countries with severe development deficits, limited government capacity and, importantly, poor healthcare infrastructure (World Food Program).

Whereas most governments have adopted the stance of lockdowns² that include staying at home, which has proven to be effective in upholding public social distancing, all in a bid to slow the spread of the virus on the one hand, these measures seem to be carrying an extraordinary high cost, most especially in poor countries, and pose new threats to hunger and increased poverty rates on the other hand (World Food Program). These measures have disrupted the production and supply of essential commodities to households, have led to food and transport price spikes, shrunk employment and ultimately led to a significant downfall of people’s incomes.

Suffice to note that majority of the workforce in developing countries are engaged in the informal sector, thereby rendering them heavily dependent on daily casual labor incomes (hand to mouth consumption), have no or limited access to formal insurance buffers, have low food stocks, and possess limited or no savings. They are mainly focused on short-term expenditures and usually experience significant income volatility, making it difficult for them to save regularly³, especially for the long term. Whereas research has shown that these groups do actually engage in some form of saving, their saving mechanisms are done in less conventional ways (Karlan et al., 2014)

Yet, long-term savings mobilization plays a substantial role in economic development of countries (Lucas, 1988; Solow, 1956), and is an important macroeconomic element that directly impacts capital accumulation, productivity and long-term economic growth. According to Karlan et al., (2014), savings mobilization is critical for individual and societal welfare. For example, at the individual level, savings help households smooth consumption and finance productive investments in human and business capital, while at the macroeconomic level, savings rates are strongly predictive of future economic growth. Ownership of savings is also essential in creating a buffer for financial shocks (Gjertson, 2016), is critical in facilitating individuals to adequately prepare for retirement⁴ (Noone, Stephens, & Alpass, 2009), and is important in allowing individuals to pursue their financial goals (Kendall, 2010; Shim, Serido, & Tang, 2012).

However, Hastings & Mitchell (2018) contend that there are two competing explanations why individuals have trouble with financial decisions that include saving for the long term. One is that people are financially illiterate since they lack understanding of simple economic concepts and cannot carry out computations such as computing compound interest, which could cause them to make suboptimal financial decisions. The second is that impatience or present-bias might explain suboptimal financial decisions, which insinuates that some people persistently choose immediate gratification instead of taking advantage of larger long-term payoffs (Ashraf et al., 2006; Rabin & O’Donahue, 1999).

This study therefore focuses on exploring the underlying behavioral mechanism of individuals affected by COVID-19 on individual time preferences i.e. discount rates and present bias. By undertaking an economic experiment with randomly sampled formal income earners who were exposed to COVID-19, we examine whether shock exposure to COVID-19 affects time preferences. The study hypotheses that exposure to COVID-19 induces higher discount rates and present biasness. Our underlying identification relies on the assumption that the shock exposure is exogenous in nature.

Our results indicate that exposure to COVID-19 induces higher discount rates, and has a positive impact on present biasness. Those who report to have been affected by COVID-19 are more impatient, and are more likely to seek for early access to their long-term savings (e.g. NSSF or Occupational Pension funds). Further, we find a heterogeneous impact among the subjects. Male subjects, those who are indebted servicing a loan, and those who did not receive a remittance within the last 3 months are found to be more impatient and are more likely to seek for early access to their long-term savings. On the contrary, we further find that females who prefer early access to their long-term savings are more present biased than their male counterparts.

This enduring effect of higher discount rates and present biasness can be partially because exposure to COVID-19 indeed affected individual preferences, which makes it difficult for those affected to invest in long-term activities, and savings for the future. If so, efforts to promote long-term savings need to take individual preferences into consideration in order not to hinder progress of stimulating long-term saving behaviors.

To the best of our knowledge, this is the first study that examines the effect of a shock exposure on time preferences specifically for formal income workers in Uganda during a global pandemic. Ascertaining the time preferences of individuals who have been exposed to COVID-19 is important because this aids policy makers towards formulation of appropriate policies from an informed point of view in spurring saving efforts for the long term. In addition, our study combines survey data and an economic experiment for the analyses.

The rest of the paper is organized as follows. Section 2 provides a brief background to the COVID-19 pandemic. Section 3 discusses the data, experimental design, and experimental results. Section 4 discusses descriptive statistics. Section 5 presents the identification strategy and estimation model. Section 6 presents the estimation results while Section 7 concludes with policy recommendations.

On December 31, 2019, the People’s Republic of China informed the World Health Organisation (WHO) of an outbreak of a respiratory causing illness, which was later named the “severe acute respiratory syndrome coronavirus 2” (SARS-CoV-2) that causes the Corona Virus Disease (COVID-19). On January 30, 2020, World Health Organization declared the outbreak as a Public Health Event of International concern (PHEIC). This became the pandemic that has been termed as “the worst health crisis of our times” with over 11 million infections and 500,000 deaths, in 216 countries by the end of June 2020. It currently has no specific vaccine or treatment.

The first COVID-19 case in Africa was reported in Egypt on February 14, 2018 with Nigeria recording Sub Saharan Africa’s first incident ten days later and East Africa discovering her first patient in Kenya on March 13, 2010, one day after WHO had declared COVID-19 a pandemic. Uganda’s first case was reported on March 21, 2020. In an effort to control the spread of the pandemic, Uganda like several nations worldwide established several similar measures. The measures in Uganda seem to be successful due to the fact that there is no single fatality yet despite over 900 confirmed cases by July 01, 2020 and to the government’s credit, there have been over 800 recoveries. Efforts to curb the spread of the COVID-19 pandemic health crisis elicited a harsh economic recession for the global economy and Uganda was not spared. In April 2020, the International Monetary Fund (IMF) World Economic Outlook (WEO) projected that the global economy will contract by 3 percent in 2020. In particular, Sub-Saharan Africa (SSA), will contract by 1.6 percent due to the fragility of commodity exports prompted by brutally low external demand, collapsed commodity prices and high capital outflows leading to currency depreciations.

Uganda in particular has been impacted in various ways. Economic activity contracted and GDP growth was projected to slow down drastically in the second half of Financial Year (FY) 2019/20, at 3 - 4 percent from 6.5 percent. This was due to a combination of global supply chain disruptions, a worsening external position accruing from capital outflows, adverse effects on the flow of international trade, tourism, workers’ remittances, foreign direct investment and loan disbursement. Other effects arose from travel restrictions, measures to limit contact between persons (lockdowns, school closures, shutting down non-essential businesses and curfew), and the sudden decline in demand. As a result, consumer-facing sectors were critically affected by social distancing measures and heightened uncertainty, while the manufacturing sector declined on account of disruptions to the inflow of raw materials. The trade sector was weighed down by the decline in external demand and supply chain disruptions, while service sectors such as finance, insurance, and information and communications were affected by the general stall in business activity and investment.

With several citizens among the country’s workforce in a similar condition, a section of the public through their political representatives⁵ requested the National Social Security Fund (NSSF) to pay members at least 20 per cent of their savings to be able to fend off the anticipated negative effects of COVID-19. The NSSF is governed by a law, which does not allow for mid-term access. The public and law makers agitated for a change to the law to include midterm access as well as provisions that allow the Fund to create products such as employment, education and housing benefits among others. In response, the Fund’s management team responded by discouraging the proposal, claiming that such a payout would benefit few, and not address the wider need for relief yet distress the sustainability of the fund, and cause irreparable damage on the wider economy and the financial system. According to the management, implementing the request required about Shs 3400 billion. Some commentators rebuffed the Fund’s stance, arguing that some of NSSF’s members had lost jobs while others had suffered natural calamities such as flooding, and therefore such members expected goodwill from their fund during such abnormal times. Others labelled NSSF’s response as simply a move to self-preserve through “fearmongering or scaremongering” to deliberately spread frightening and exaggerated information meant to arouse public fear. According to critics, the Fund gave a one-sided narrative, yet it was better to seek solutions that work for members seeing that the fate of the Fund, its members and employers are intertwined.

Table 1 presents summary statistics for the individuals (experiment subjects) who responded to the online survey. The mean age of the subjects is 38.05 years, 72% are married while 60% of the respondents are male. Average household size is 5 members, with each household composed of an average of 3 children (below 18 years), while 76% of the respondents are household heads.

The average gross salary is about Ugx5, 090,344/- and only 38% of the respondents have another source of income apart from their monthly salary. 72% are servicing a loan with a financial institution. 13% of the respondents received remittances within the last 3 months, with majority of the remittances used for

consumption⁸. 91% claim that they were financially and economically affected by the COVID-19 pandemic.

A total of 78.8% of the respondents recommend the law to be amended to enable them have early access to their long-term savings, and of these, 91.3% prefer to access part of their savings at age 45.4 years. For those who don’t recommend early access to their long-term savings, 91.48% prefer accessing their savings at age 55 years, while 5.52% prefer accessing their savings at age 60 years.

Table 2 presents summary statistics categorized by two groups; those who indicated that they were severely affected by COVID-19 pandemic, and those who were not affected by the pandemic. We use the ttest inferential statistic to determine if there is any significant statistical difference between the means of two groups. Without controlling for any covariates, we do not find any significant statistical difference between those who were affected by COVID-19 pandemic and those not affected in terms of age, marital status, gender, being a household head, and those who received remittances in last 3 months.

However, we find that households with more household members are more likely to have been affected by the pandemic. Similarly, households with more children were more affected by the pandemic. Individuals with less income and those without another source of income apart from their salaries are more likely to be more affected by the pandemic. Individuals that are servicing a loan from a financial institution are more affected by the pandemic, while those that indicated that they prefer early access to their long-term savings are found to be more affected by the pandemic.

Table 3 presents summary statistics categorized by two groups; those who indicated that they prefer early access to their long-term savings, and those who do not prefer early access to their long-term savings. We do not find any significant statistical difference for age, gender and those who received remittances in last 3 months. We however find that those who prefer early access to their long-term savings have higher discount rates. Similarly, those who are family heads and those married prefer early access to their long-term savings. Households with larger families and those with more children prefer early access to their long-term savings. Likewise, those with less salaries, those with no other income apart from salary and individuals that are servicing a loan from a financial institution are all found to prefer early access to their long-term savings.

Table 4 shows the number of respondents per organization/sector, and the average discount rates for each organization/sector for experiment 1 and 2. As expected, we find that the export/import sector, hotel sector and transport sector indicate the highest average discount rates (above 30%) for both experiments 1 and 2. This may be on the premise that these sectors were amongst those most hit by the COVID-19 pandemic in Uganda.

To identify the impact of the shock exposure (COVID-19) on individual time preferences, we construct a binary variable that takes the value 1 if a respondent indicated that they were affected by the COVID-19 pandemic, and 0 if not affected. We estimate the following model by ordinary least squares (OLS) estimation.

y i d = β 0 + β 1 D i d + β 2 X i d + μ d + e i d (1)

where y i d denotes individual time preference parameters of individual i from organization d. D i d is a dummy variable taking the value 1 if individual i in organization d reports that they were affected by the COVID-19 pandemic, and 0 not affected. X is a vector of a set of controls, including individual and household characteristics as shown in Table 1. μ d is organizational fixed effects. e i d denotes the error term. After controlling for the covariates, the effect of COVID-19 on time preferences is measured by β 1 . We argue that the exposure to COVID-19 is exogenous given the nature and spread of its occurrence worldwide. For our regression specification, robust standard errors are clustered at the organization level to account for sampling scheme and possible correlation among respondents in the same organization.

We acknowledge some constraints with the study. Since we did not collect pre COVID-19 individual preference data, it may be difficult to ascertain past preference behaviors of the respondents. In addition, if some subjects in some organizations were never targeted, most likely because they never got the opportunity to receive the link to the questionnaire and therefore did respond to our questionnaire, yet they have different time preferences from those who responded, the estimated impact can be biased. The direction of the bias, however, is not clear. For example, if the non-respondents have a high/low discount rate or are more present biased, the impact on time preferences could be over/under-estimated. Whereas we include various covariates as controls and organizational fixed effects, the estimated effect needs to be interpreted with some level of caution.

Table 5 presents regression results for discount rates where the shock exposure variable is a binary that takes a value 1 if respondent indicated that they were affected by COVID-19, and 0 otherwise. The dependent variable is the discount parameter. For all the estimations, robust standard errors are clustered at the organizational level and organizational fixed effects are included to account for organization specific time-invariant unobserved heterogeneity. Column 1 and 3 do not include fixed effects, while column 2 and 4 include fixed effects. Consistently, the estimated results show that exposure to COVID-19 induces higher discount rates, suggesting that those who were severely affected by COVID-19 are more impatient. The results are robust when with and without fixed effects, even when we limit the covariates. We find that age and those with another source of income apart from salary are negatively associated with discount rate.

In Table 6, we estimate the same specifications as in Table 5, this time restricting columns 1 and 2 to subjects that prefer early access to their long-term savings, while columns 3 and 4 are restricted to those who do not prefer early access to their long-term savings. The estimated results in columns 1 and 2 show that exposure to COVID-19 induces impatience for those who prefer early access

Notes: Organizational fixed effects included. Organization robust clustered standard errors are in parenthesis. Significance levels are ***p < 0.01, **p < 0.05, and *p < 0.1. Columns 2 and 4 include organizational fixed effects.

Notes: Organizational fixed effects included. Organization robust clustered standard errors are in parenthesis. Significance levels are ***p < 0.01, **p < 0.05, and *p < 0.1. Columns 1 and 2 are restricted to subjects that preferred early access to their long term savings. Columns 3 and 4 are restricted to subjects that did not prefer early access to their long term savings.

to their long-term savings. We find no effect when we restrict our sample to those who do not prefer early access to their long-term savings.

In Table 7, Column 1 is restricted to male subjects; Column 2 is restricted to female subjects; Column 3 is restricted to subjects who are servicing a bank loan; Column 4 is restricted to subjects who are not servicing a bank loan; Column 5 is restricted to subjects who received remittances within the last 3 months; Column 6 is restricted to subjects who did not receive any remittances in the last 3 months. We find significant results for columns 1, 3 and 6, suggesting that male subjects are more impatient, those servicing a bank loan are more impatient and subjects who did not receive any remittances in the last 3 months are more impatient.⁹

Table 8 presents regression results for present bias where the shock exposure variable is a binary that takes a value 1 if respondent indicated that they were affected by COVID-19, and 0 otherwise. The dependent variable is the present bias

Notes: Organizational fixed effects included. Robust clustered standard errors are in parenthesis. Significance levels are ***p < 0.01, **p < 0.05, and *p < 0.1. Column 1 is restricted to male subjects. Column 2 is restricted to female subjects. Column 3 is restricted to subjects who are servicing a bank loan. Column 4 is restricted to subjects who are not servicing a bank loan. Column 5 is restricted to subjects who received remittances within the last 3 months. Column 6 is restricted to subjects who did not receive any remittances in the last 3 months.

Notes: Organizational fixed effects included. Robust clustered standard errors are in parenthesis. Significance levels are ***p < 0.01, **p < 0.05, and *p < 0.1. Columns 1 includes whole sample. Columns 2 is restricted to subjects that preferred early access to their long term savings. Columns 3 is restricted to subjects that did not prefer early access to their long term savings. Columns 4 is restricted to subjects that preferred early access to their long term savings and are male. Columns 5 are restricted to subjects that preferred early access to their long term savings and are female.

parameter. We do not find any significant results showing any evidence of present biasness. Even when we restrict our sample to those who prefer (Column 2) and those who don’t prefer (Column 3) early access to their long term savings, we do not find any significant results. In Column 4 and 5 we restrict our sample to those who prefer early access to their long term savings, with Column 4 restricted to male subjects and Column 5 restricted to female subjects. We find that male subjects who preferred early access to their long term savings are less present biased, while female subjects who prefer early access to their long term savings are positively and significantly present biased, implying that that they chose current gratification over future, higher payoffs.

This study estimated the effects of exposure to COVID-19 on time preferences by utilizing an experimental approach. The estimation results indicate that exposure to COVID-19 induces higher time discount, and has an effect on present biasness. Those who were severely affected by COVID-19 are more impatient and are more likely to seek for early access to their long-term savings. We also estimated alternative tests restricting our sample to males, those servicing a bank loan, and those who did not receive any remittances in the last 3 months and find that they are more impatient and are also likely to seek for early access to their long-term savings. Females who prefer early access to their long-term savings are found to be more present biased than the male counterparts. Based on our main findings, exposure to COVID-19 might have long-term negative consequences on individuals’ attitudes and therefore making it inevitable for policy makers to take preferences into consideration when formulating saving programs. This is important because preferences plausibly support the identification of mechanisms that may affect individual savings behavior, which may help policymakers design effective policies from an informed viewpoint.

Evidence from our results implies that those who were financially and economically affected by COVID-19 are particularly likely to suffer from the effects of COVID-19, and are principally eager to access their long term savings now. Early withdrawal of savings from an individual’s pool of long-term savings may result in a significant reduction in how much one will have in old age (retirement). Those contemplating withdrawing an amount from their pool of long-term savings should have regard to the longer-term financial implications of such a decision. The long term financial implications essentially have to do with the investment earnings foregone in respect of amounts withdrawn now.

Policy makers should therefore ensure that these groups are provided with targeted interventions such as consulting, financial literacy¹⁰ and entrepreneurship programs which presumably are likely to improve not only their financial behavior but also trigger investment and saving behaviors, and long-term economic prosperity. Karlan et al. (2014) argue that although savings is becoming a priority in the development agenda, it is not clear a priori that under-saving is a widespread problem, and that everyone should save more, at least in the form of additional financial assets or investment. Anecdotal evidence suggests that some individuals are reluctant to set money aside for their retirement if they cannot use that money for emergencies, and therefore a forced saving mechanism (just like NSSF for formal workers) may be inevitable. Individuals also need to be encouraged to set aside emergency savings, separate from retirement savings, for situations of hardship e.g. COVID-19, temporary income loss and medical circumstances among others. In addition, carefully applying penalties on withdrawals that are not paid back or making withdrawals conditional on certain situations can deter individuals from dipping into their long term savings accounts.

In terms of future research, it would be interesting to investigate the impact of these interventions on the long-term economic outcomes. It is noteworthy that in many low-income countries, preference data are limited or unavailable (Tanaka & Yamano, 2015). Therefore, the recent development of eliciting individual preferences through economic experiments, as this study does, will enable policymakers to take preferences into consideration when formulating financial literacy and savings programs.

The authors declare no conflicts of interest regarding the publication of this paper.

Makanga, B., Walusimbi, V., & Nakawesi, C. L. (2022). Behavioral Response to Shock Exposure: CO- VID-19 Pandemic and Long-Term Savings. Open Journal of Business and Management, 10, 1310-1331. https://doi.org/10.4236/ojbm.2022.103071

Notes: The table shows all the payoffs (M) and timing (t) in months of payment for choices A and B in experiment 1. The range of discount r is calculated by equating the discounted value from lottery A and lottery B.

Notes: The table shows all the payoffs (M) and timing (t) in months of payment for choices A and B in experiment 2. The range of discount r is calculated by equating the discounted value from lottery A and lottery B.