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Psychology of Poverty: Preferences, Decision-Making and Productivity

Paper Session

Friday, Jan. 3, 2020 8:00 AM - 10:00 AM (PST)

Manchester Grand Hyatt, America's Cup AB
Hosted By: Economic Science Association
  • Chair: Dietmar Fehr, University of Heidelberg

Does Financial Strain Lower Worker Productivity?

Supreet Kaur
,
University of California-Berkeley
Sendhil Mullainathan
,
University of Chicago
Suanna Oh
,
Columbia University
Frank Schilbach
,
Massachusetts Institute of Technology

Abstract

This paper empirically tests for a direct causal impact of financial strain on worker productivity.
We randomize the timing of income receipt among Indian workers who earn piece rates for manufacturing tasks: some workers receive their wages on earlier dates, altering when cash constraints are eased while holding overall wealth constant. Workers increase productivity by 5.3% on average in the days after cash receipt. The impacts are concentrated among poorer workers in the sample, who increase output by over 10%. This effect of cash on hand on productivity is not explained by mechanisms such as gift exchange, trust in the employer, or nutrition. We present positive evidence that productivity increases are mediated through lower attentional errors in production, indicating a role for improved cognition after cash receipt. Finally, directing workers' attention to their finances via a salience intervention produced mixed results. Such primes do not appear to work effectively as a way to test the impact of worries as they also induce effort responses. Taken together, our results indicate a direct relationship between financial constraints and worker productivity and suggest that psychological channels mediated through attention play a role in this relationship.

Poverty, Seasonal Scarcity and Exchange Asymmetries

Dietmar Fehr
,
University of Heidelberg
Gunther Fink
,
Swiss Tropical and Public Health Institute and University of Basel
B. Kelsey Jack
,
University of California-Santa Barbara

Abstract

A growing literature associates resource scarcity with biases in decision-making. We investigate this link in a sample of over 3,000 small-scale farmers in Zambia, who completed a total of 5,842 decision experiments involving the opportunity to exchange randomly assigned household items for alternative items of similar value. We observe large exchange asymmetries – the so-called endowment effect – with an average trading probability of 34 percent, 16 percentage points below the trading rate predicted by neoclassical theory. Consistent with both increased attention and larger potential trading losses with higher value items, exchange asymmetries are smallest when the value of the traded items is high and when participants are relatively resource constrained. In our sample, both cross-sectional and seasonal scarcity improves the quality of decision-making, moving behavior closer to standard economic predictions. We find no corresponding systematic relationship between scarcity and performance
on cognitive tasks.

Cognitive Droughts

Guilherme Lichand
,
Harvard University
Anandi Mani
,
University of Warwick

Abstract

This paper tests whether uncertainty about future rainfall affects farmers’ decision-making through cognitive load. Behavioral theories predict that rainfall risk could impose a psychological tax on farmers, leading to material consequences at all times and across all states of nature, even within decisions unrelated to consumption smoothing, and even when negative rainfall shocks do not materialize down the line. Using a novel technology to run lab experiments in the field, we combine survey experiments with recent rainfall shocks to test the effects of rainfall risk on farmers’ cognition, and find that it decreases farmers’ attention, memory and impulse control, and increases their susceptibility to a variety of behavioral biases. Effects are quantitatively important, equivalent to losing 25% of one’s harvest at the end of the rainy season. Evidence that farmer’s cognitive performance is relatively less impaired in tasks involving scarce resources suggests that the effects operate through the mental bandwidth mechanism.

Effects of Poverty on Impatience: Preferences or Inattention?

Vojtech Bartos
,
University of Munich
Michal Bauer
,
CERGE-EI
Julie Chytilová
,
Charles University
Ian Levely
,
King's College London

Abstract

We study two psychological channels how poverty may increase impatient behavior – an effect on time preference and reduced attention. We measured discount rates among Ugandan farmers who made decisions about when to enjoy entertainment instead of working. We find that experimentally induced thoughts about poverty-related problems increase the preference to consume entertainment early and delay work. The effect is equivalent to a 27 p.p. increase in the intertemporal rate of substitution. Using monitoring tools similar to eye tracking, a novel feature for this subject pool, we show this effect is not due to a lower ability to sustain attention.
Discussant(s)
Pamela Jakiela
,
University of Maryland and Center for Global Development
Sandip Sukhtankar
,
University of Virginia
Leandro Carvalho
,
University of Southern California
Margaret McConnell
,
Harvard University
JEL Classifications
  • O1 - Economic Development
  • D9 - Micro-Based Behavioral Economics