Tuesday, February 12, 2013

Poverty exacerbates self-control issues

Conservative pundits tend to blame the poors' behavioral issues for their fate. Liberals tend to claim that the poor do not have a fighting chance to make it from the day they were born. And of course neither is completely right, the truth is somewhere in between. It is the economists' task to find where that is.

Douglas Bernheim, Debraj Ray and Sevin Yeltekin bring an interesting piece to this question by integrating self-control issues into a standard model of savings. They are careful to limit the time-inconsistency to eliminate extreme cases where someone would never save (which belong to state assistance anyway) or would never use assets. Then it turns out that self-control issues are amplified by initial poverty. The reason that this poverty trap emerges is that if you have few prospects of assets in the future, there is little to lose from deviating from optimal, time-consistent behavior. If you have more assets or you know you should have more in the future, there is a lot to lose from falling in the trap. This implies, as whenever there is a trap, that one can help these poor people by providing them with enough support to get above the threshold level, and then they can happily fend for themselves.


Kansan said...

So true, and so frustrating!

Kansan said...

Oops, wrong thread.