The Indian Cow – illiquid

India CowBack after the Christmas break with an article that I found in the print edition of The Economist.

Cows in India, which number 280m, have been seen as a poor investment when you consider the return the Indian farmer gets. Cattle are expensive to keep and the cost of feed for one cow per year is approximately US$160 a year. Some research has suggested the return on a cow is -64%

So the question The Economist asked is why do households in India buy them?

Households may prefer to produce high-quality milk at home, even if doing so costs more.

Only 7% of Indian villages have a bank branch. That means people lack a formal savings mechanism for their spare cash. And although there are informal ways to save—joining a local savings club, for example, or simply stuffing money under the mattress—owning a cow may be a better option. With the liquid nature of money people find it easier to spend money which they sometimes regret. This is referred to by economists as “myopia”. As the cow is quite illiquid (not easy to instantly turn into cash) it is therefore less myopic which means immediate spending is more difficult.

In future the idea of commitment savings accounts in developing countries has been raised whereby people forgo their right to withdraw funds until they reach a specified level.

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  1. Pingback: So you think you are rational? | econ2day

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