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Poor but Rational?
Abstract
Modern development economics emerged with the realization that poverty changes the set of options available to individuals. Poverty thus affects behavior, even if the decision maker is "neo-classical": unboundedly rational, forward looking, and internally consistent. The "homo economicus" at the core of neo-classical economics ("calculating, unemotional maximizer", Mul-lainathan and Thaler (2000)) would behave differently if he was poor than if he was rich. As-set market failures and preferences towards risk are sufficient to explain why asset ownership matters, and first-best transactions and investments may not always take place. The initial theoretical advances 1 opened a new empirical agenda to mainstream economists: The stake was not to accept or reject the hypothesis of "poor but efficient", and with it all the postulates of neo-classical economics; the task of empirical economics shifted to providing evidence for market inefficiencies, and the impact of economic policies to alleviate them. Thus, the paradigm "poor but neo-classical" helped define an empirical agenda and structure a vision of the world, even though it often remained implicit in empirical work. In turn, many of its predictions have been substantiated by the data. But there are also some fundamental facts for which this view of the world does not account. Using two classic examples, which have been very fertile ground for research in development economics — insurance and agricultural investment — I will try to explore how far this agenda led us, and what remains out of its reach.
... There have been some forays examining deviations from the predictions based on the rational actor model across different populations, notably studies of the impact that poverty has on decision-making. While some studies establish ways in which poverty decreases cognitive ability through the additional stresses associated with living in poverty (Mani et al. 2013;Haushofer and Fehr 2014), others argue that the influence of poverty on decisions is related more to additional constraints and a constant presence of risk in the lives of the poor (Duflo 2006;Banerjee and Duflo 2007;Carvalho et al. 2016). There is a growing body of literature that establishes that the poor are less subject to some of the cognitive biases found by Kahneman (Shah et al. 2015, 2018). ...
... In addition to the lack of formal insurance, the poor face more constant and pervasive risks in their lives than do those who are wealthier (Banerjee and Duflo 2007;Carvalho et al. 2016;Duflo 2006). Being poor leaves little margin for error thus causing the poor to be discerning. ...
We examine the question of rationality, replicating two core experiments used to establish that people deviate from the rational actor model. Our analysis extends existing research to a developing country context. Based on our theoretical expectations, we test if respondents make decisions consistent with the rational actor framework. Experimental surveys were administered in Côte d’Ivoire and Ghana, two developing countries in West Africa, focusing on issues of risk aversion and framing. Findings indicate that respondents make decisions more consistent with the rational actor model than has been found in the developed world. Extending our analysis to test if the differences in responses are due to other demographic differences between the African samples and the United States, we replicated these experiments on a nationally representative analysis in the U.S., finding results primarily consistent with the seminal findings of irrationality. In the U.S. and Côte d’Ivoire, highly educated people make decisions that are less consistent with the rational model while low-income respondents make decisions more consistent with the rational model. The degree to which people are irrational thus is contextual, possibly western, and not nearly as universal as has been concluded.
... When the public safety net is inadequate, families must seek alternative strategies to create economic security. The financial decisions of the poor receive a great deal of attention within academic and policy circles due to concerns that poor households do not allocate resources optimally (Bertrand, Mullainathan, and Shafir 2004;Duflo 2006;Shafir 2009, 2013;Spears 2011), but this work rarely investigates householders' decision-making rationales directly. In this article, we examine the coping strategies low-income families adopt to mitigate economic risk by studying how they allocate their tax refunds, which come once a year via the EITC and CTC. ...
... Although kin networks are an important form of support for lower-income households (Edin and Lein 1997;Stack 1974), the main resources they draw on to insure against adverse events and unexpected income losses-savings, kin, and credit-tend to be more limited than those of economically advantaged households (Harknett 2006;Keister and Moller 2000). Although traditional economic models of financial behavior characterize the financial decision making of the poor as irrational and attribute their financial behaviors to psychological errors (Bertrand et al. 2004;Duflo 2006;Shafir 2009, 2013;Spears 2011), in-depth investigations of the decision making within poor households has revealed the importance of social context in shaping financial decisions and the meanings individuals attribute to their finances. ...
The public safety net has increasingly functioned as a system that rewards work, but many low-wage workers now face a double bind: unstable incomes and volatile expenses. We ask how low-wage workers make resource allocation decisions under conditions of uncertainty by examining how they spend and save their tax refunds. Using data from in-depth interviews with a sample of 115 lower-income working families, we find that more than three quarters of families experienced an income or expense shock in the past three years. Although many had aspirations for upward mobility, the insecurity of daily life meant they devoted most of their refund dollars to creating a personal safety net to cushion against income and expense shocks. What appeared to be distinct types of allocations often had the same underlying rationale goal of improving a family’s economic security in the near term. By saving, purchasing durable goods, stockpiling household staples, and paying off debts to kin and creditors at tax refund time, families leveraged their tax refund dollars into multiple forms of self-insurance. Respondents held aspirations for upward mobility that correspond strongly with those of middle-class Americans, but they did not feel they had the luxury of setting aside resources for long-term mobility goals given the instability and insecurity of their work and family lives. Instead, they invested their refunds in more precautionary ways. What might be viewed as current consumption by outsiders was actually a form of in-kind investment that occurred outside the purview of the formal banking system.
... The limited responsiveness to high marginal product in poor countries is usually attributed to market failures of various kinds (for a survey see Banerjee and Duflo 2004). Recently, growing attention has been directed towards behavioral issues and psychological barriers that limit saving and investment decisions not by affecting the constraints, but by changing the decision-making process (Duflo 2006;Mullainathan 2005). ...
... Second, education may play an important role in developing control mechanisms to manage the temptations of present consumption. This understanding resonates with the increasingly loud calls among development economists for the exploration of not only the structural constraints that poverty imposes on the decision-making of the poor but for taking seriously also the internal barriers to saving and investing in the absence of suitable institutions (Duflo 2006, Armedáriz de Aghion and Morduch 2005). A recent study from rural India ( Bauer et al.-23-2008), however, finds that education correlates with the level of discounting, but not with present-biased (or hyperbolic) discounting. ...
Heterogeneity in inter-temporal preferences may reinforce the existing barriers to save and invest for rural population in developing countries. Despite the importance of discounting, little is known how it is formed. We estimated discount rate for substantially varied sample of Ugandan villagers. Discount rate decreased with education and increased with age. A convincing analysis of the causal link between education and discount rate requires an exogenous source of variation in schooling. We took advantage of varying school frequency in different villages and the Ugandan education reform in 1996 that abolished school fees on public primary schools. By using these variables as instruments we found significant impact of education on discount rate. This finding underlines the role of education in development and is of obvious importance for policy.
... Recent studies focus on why farmers and sheepherders seem to be more conservative than other social groups (Lafuente 2005). Duflo (2006) argue that individuals living in subsistence conditions are more conservative because they have more to lose. In a similar vein, Richardson and McBride (2009) argue that religious extremism is more likely in societies with significant mortality shocks. ...
We analyze the case of pro-pluvia rogations (PPR) performed by the Catholic Church in Murcia, Spain since 1600. PPR were ceremonies to ask God for rain. We show a structural break in the prayer data during the 1830s, coinciding with the end of the ancien régime in Spain. PPR responded to environmental shocks and were used by the civil and ecclesiastical authorities to control the population, ensure stability, and maintain the status quo. Thus, PPR in Murcia have acted as a social resilience instrument. At the same time, PPR highlight the conflict between civil and religious authorities and within religious authorities. Understanding the motives, timing, and other characteristics of religious rituals is crucial to understand the evolution of institutions, the persistence of beliefs and strategies for social adaptation to the environment over the long run.
... Extension services play a crucial role by expanding farmersʼ access to information and improving their skills, thereby increasing the likelihood of technology adoption and raising Small-scale aquaculture enterprises in developing countries face high input costs, a scarcity of capital, and a lack of access to credit (Duflo, 2004;Jimi et al., 2019). Credit is an important tool for improving farm productivity, particularly because it facilitates the adoption of modern technologies and the expansion of farming operations (Diagne & Zeller, 2001;Henning et al., 2019;Jimi et al., 2019). ...
This report presents key findings on the landscape of small-scale aquaculture in Malawi and the challenges faced by fish farmers. This report characterizes small-scale fish farmers, evaluates the profitability of fish farming, and identifies key challenges faced by those who depend on fish for their livelihoods. The evidence outlined here comes from a survey of 732 farms, both individually and communally owned farms , conducted in June-July 2021 in 10 districts in Malawi.
... Нельзя полагать, что если дать бедной семье деньги, то дети в семье будут лучше питаться. Э. Дюфло описала это обстоятельство почти афоризмом: «Слишком много желаний соперничают с едой» [10]. ...
The article presents three Nobel Prize winners in economic sciences 2019 as well as the results of their researches. The paper highlights the primary goal of the laureates’ research aimed at improving the effectiveness of foreign aid to poor countries. Along with this, the author considered three achievements of the winners noted by the Nobel Committee: randomized field experiments, establishing new links between microeconomics and macroeconomics, the original method of research on the causes of poverty. The winners showed that financial assistance to poor countries should be accompanied, and possibly preceded, by pilot studies of the effectiveness of this assistance. The primary way to improve the efficiency of foreign aid laureates see in creating conditions for self-improvement of their situation by low-income families. And this, according to the laureates, can be achieved through solving the problems of health and education in countries receiving foreign aid. To verify that idea the laureates conducted experiments in Kenya, India, other countries in Africa, Asia, and Latin America. The author also provides evidence that foreign aid to poor countries is less than cash flows going in the opposite direction.
... The presence of risk affects farmers' production decisions in multiple ways (Dercon, 2009;Moschini & Hennessy, 2001;Ray, 1998). In the absence of credit and insurance markets, common in rural areas of the Global South, farmers will often accept lower incomes in the place of income volatility (Alderman & Paxson, 1994;Duflo, 2006). In the worst-case scenario, risk management and risk coping mechanisms adopted by farmers can deepen their poverty (de Janvry, Ritchie, & Sadoulet, 2016). ...
The fertile floodplain of the Amazon river offers considerable potential for agriculture, yet it is a risk-filled environment with heightened vulnerability due to climate change. The annual flood pulse deposits nutrient-rich sediment on the floodplain enabling increased agricultural productivity during the low water season. However, crops growing on the floodplain are at high risk of loss due to flood dynamics. Drawing on data from household surveys (n = 83), focus group discussions, and key informant interviews, this study assesses potential flood risk mitigation tools for floodplain rice farmers along the Amazon river near Iquitos, Peru. Farmers’ risk mitigation preferences are explored through willingness to pay (WTP) methods for flood-tolerant rice varieties, river information services, and index-based flood insurance. Results indicate that measured ambiguity aversion is a key driver in the decision to mitigate flood risk. The study suggests that the environmental risk context may be appropriate for an index-based flood insurance product, and farmers and local institutions see the promise of flood insurance. With climate change scenarios predicting greater variability in the flood regime, mitigating flood risk is paramount to reducing the vulnerabilities and unlocking opportunities for floodplain farmers in Amazonia.
... Uncertainty and risk. Poor producers, entrepreneurs and other low-income market actors face greater risks and fewer mechanisms and institutions to mitigate their risks (Duflo, 2006). The weather is uncertain, natural disasters are unpredictable, crops fail, political insecurity is often high, and economic disruptions from strikes and price volatilities disproportionately impact the poor. ...
The world’s poorest citizens exist in a context of extreme uncertainty over which they have little control. Contemporary philanthrocapitalist aid is grounded in the premise that economic gain will empower the world’s poor, and the expectation that the market should be driven by rational self-interested economic decision-making. We critique this approach and draw on the Uncertainty Management Model of justice to explore the importance of managing uncertainty and trust in the relationships between actors in an emerging market. We explored our propositions through two survey studies in Bangladesh, sampling poor dairy producers, entrepreneurial milk collectors who act as market intermediaries, and informal buyers in towns. In our first study, we found that female dairy producers’ perceptions of fairness in their family had a stronger effect on well being when their tolerance for uncertainty was low. Further, fairness associated with their family or producer cooperative groups’ fairness conflicted with system justification, another uncertainty management strategy whereby a person may still consider the social system to be legitimate, natural, and inevitable despite being disadvantaged by it. In our second study, we found that milk collectors and buyers in the informal market had different bases for trust and perceptions of benevolence of the other party. Collectors’ trust judgments were more influenced by features of the transaction process that addressed uncertainty than price or features that affected price. Informal buyers had a more economic mindset, trusting in and considering both milk collectors and dairy producers to be more benevolent to the extent that they engaged in value-maximizing behaviors. These empirical findings from a sample of producers, sellers, and buyers help shed light on how emerging markets are constructed through social processes, not just economic ones. Implications for intervention are discussed.
... Unproductive capital for rent-seeking, on the other hand, is associated with a relatively smaller time lag between investment and returns. 2 Hence, the returns to investment in these two types of capital depend not only on market factors and the size of government, but also on individuals' time preferences. Recent research on the underinvestment in productive capitals directs toward such behavioral issues which limit investment decisions by changing the decision-making process (Duflo, 2006;Mullainathan, 2005). 1 Both Ehrlich and Lui (1999) and Wadho (2014) label this unproductive capital as "political capital." 2 This, for example, can be taken as having links with public officials who can help in tax avoidance/evasion, which may not need a number of years of accumulation. Becker and Mulligan (1997) suggest that the interaction between time preferences and individual characteristics, such as education, wealth, and addictions, can partially explain this observation. ...
We explore the relationship between government size and economic growth in an endogenous growth model with human capital and an unproductive capital which facilitates rent-seeking. With exogenous as well as endogenous time discounting, we find a non-monotonic relationship between the size of government and economic growth. We find that with very high (low) discounting, there is a unique low (high) growth equilibrium, regardless of the size of government. For the intermediate range of discounting, there are multiple equilibria and the growth outcome depends on the size of government. With endogenous time discounting, the growth outcome is path dependent and depends on the level of inherited human capital. However, there is only one stable growth regime and the economy endogenously switches to it. When the institutional constraints on rent-seeking are not extremely high, the stable regime is the one in which there is a high-growth equilibrium for a smaller size of the government and for larger size, both the high-growth and the low-growth equilibrium coexist. When the institutional constraints on rent-seeking are extremely high, there exists only a unique high-growth equilibrium irrespective of the size of government. Furthermore, economies with bigger size of the government and/or with poor quality institutions will take longer to endogenously switch to this stable growth regime.
... Ray (2006) states that poverty stifles individual aspirations and may cause aspirations failure which in turn lead to a self sustaining poverty trap. Moreover, Duflo (2006) also argues that poverty affects the way people think and make decisions. Due to the prevalence of chronic poverty, children in developing countries mostly fail to aspire for higher educational attainment; they simply focus on quick fix solutions and forget the bigger picture. ...
... More recently, behavioural economists have proposed an alternative view which highlights the role of internal constraints in perpetuating poverty traps. Behavioural biases, such as aspiration failure defined as 'the failure to aspire to one's own potential' (Dalton et al., 2015, p. 1), alter people's decision-making processes, de facto constraining individuals' abilities to make efficient decisions and take advantage of new opportunities when they become available (Duflo, 2003). ...
We use unique individual-level panel data from Ethiopia to investigate the role of aspirations for human-capital investments. More specifically, we investigate how parental and children’s aspirations form and document the relation between early aspirations and educational attainment at the age of 15 and 19. We find that aspirations are predictive of the number of year of schooling completed upon controlling for cognitive and non-cognitive skills together with a broad set of individuals and household-level characteristics. Interestingly, this correlation is stronger for boys than for girls. We find evidence of an early age pro-boys gender bias in aspirations which is diverted by age 19 when more girls than boys are still enroled at school. Finally, we documented the transmission of aspirations from parents to children and the role played by parental non-educational expectations in explaining this gender bias.
... And if we see development as freedom, giving households the freedom to use their subsidies as they please is an advance. This difference is particularly significant, as there is now growing evidence that the demand patterns of the poor do not necessarily follow norms that economists or governments would like (Duflo, 2007). While this argument can be appealing, especially in the abstract, in reality there are two other issues being brushed under the carpet. ...
... The channels through which perceived financial difficulties may affect future income poverty may be found in the recent and growing literature on the behavioural economics approach to poverty (Bertrand et al., 2004;Duflo, 2006). Departing from the standard neoclassical approach, the behavioural approach to poverty suggests that "poverty changes the set of options available to individuals. ...
An individual’s economic ill fare can be assessed both objectively, looking at one’s income with reference to a poverty line, or subjectively, on the basis of the individual’s perceived experience of financial difficulties. Although these are distinct perspectives, income poverty and perceptions of financial difficulties are likely to be interrelated. Low income (especially if it persists) is likely to negatively affect perceptions of financial difficulties and, as recently suggested by the behavioural economics literature, (past) subjective sentiment may in return influence individual’s income generating ability and poverty status. The aim of this paper is to determine the extent of these dynamic cross-effects between both processes. Using Luxembourg survey data, our main result highlights the existence of a feedback effect from past perceived financial difficulties on current income poverty suggesting that subjective perceptions can have objective effects on an individual’s behaviour and outcomes.
... The channels through which perceived financial difficulties may affect future income poverty may be found in the recent and growing literature on the behavioural economics approach to poverty (Bertrand et al., 2004;Duflo, 2006). Departing from the standard neoclassical approach, the behavioural approach to poverty suggests that "poverty changes the set of options available to individuals. ...
An individual's economic ill fare can be assessed both objectively, looking at one's income with reference to a poverty line, or subjectively on the basis of the individual's perceived experience of financial difficulties. Although these are distinct perspectives, income poverty and perceptions of financial difficulties are likely to be interrelated: low income (especially if it persists) is likely to negatively affect perceptions of financial difficulties and, as recently suggested by the behavioral economics literature, (past) subjective sentiment may in return influence individual's income generating ability and poverty status. The aim of this paper is to determine the extent of these dynamic cross-effects between both processes. Using Luxembourg survey data, our main result highlights the existence of a feedback effect from past perceived financial difficulties on current income poverty suggesting that subjective perceptions can have objective effects on an individual's behaviour and outcomes.
... This entails adopting a more favorable portfolio of activities in terms of risks but (often) less favorable in terms of profit and efficiency (Morduch, 1994). There is a broad collection of empirical studies which provide the evidence of the conflict between risks and productive choices, leading to a deterioration of efficiency when safety is crucial (Rosenzweig and Binswanger, 1993;Morduch, 1993;Duflo, 2003). The results of these studies suggest that vulnerable peasants (and especially those who earn a good living and who have to lose more) will tend to prefer safety or a preserving strategy with low outputs, compared to a risky strategy with potential high outputs. ...
The objective of this paper is to evaluate the relationship between informal risk management strategies, such as
crop and nonfarm diversification, and technical efficiency of food crop producers in Cameroon. The
methodology is based on (a) estimating the efficiency levels from a non parametric Data Envelopment Analysis
(DEA) approach and (b) using statistics tools (Pearson correlation and mean tests) to assess the impact of
diversification on efficiency. Data is obtained from tomatoes, potatoes and banana-plantain producers in 19
villages and peri-urban zones in the Center and West regions of Cameroon. Results indicate low levels of
efficiency and a negative correlation between diversification practices and efficiency.
... For example,Duflo (2006) andRay (2010) suggest that it is unclear whether the constant exposure to economic hardships is conducive to a greater commitment to the betterment of the region and/or country where individual live or to discouragement. 30 Some exceptions that come to mind includeFeigenberg et al (2009) andKarlan (2005 and among others. ...
... La literatura económica sugiere que los rasgos no cognitivos (entre ellos la autoestima y la autoeficacia) son tan importantes como las habilidades cognitivas para el desempeño académico y laboral (ver por ejemplo Heckman y Rubinstein, 2001). Más recientemente, las investigaciones de la economía del comportamiento sugieren que vivir en la pobreza no solo implica una mayor restricción presupuestaria y un margen más pequeño para errar (Bertrand et al., 2004) sino que, de hecho, afecta la forma en que la gente toma decisiones y podría llevar a una toma de decisiones poco efectiva, incluso si es racional (Duflo, 2003). En otras palabras, la interacción entre las restricciones internas y externas afecta el proceso de toma de decisiones. ...
... In addition to negatively affecting childhood neurological and cognitive development, poverty also has more in situ effects on decision making. Beyond cognitive impairment derived from childhood economic deprivation and chaos, poverty has a more immediate effect on the weighing of costs and benefits and one's temporal orientation that leads to poor decision making and risky choices, from eating less healthy food to forgoing the purchasing of needed medications, to involvement in crime and substance abuse. 2 Because of pressing economic demands, the poor are confronted with many more demands for self-control, self-control that becomes more easily depleted and those in poverty subsequently make less rational decisions (Duflo 2006). In a randomized lab experiment and partially randomized field experiment in India, Spears (2011) found that being presented with a small budget (economic distress) led to poor economic decision making and the mechanisms involved seemed to be both a deficit in cognitive control, working memory, and will power. ...
Minority groups are significantly overrepresented in crime. Theories of racial differences in crime developed using two separate and distinct approaches that highlight either increased exposure to criminogenic factors at the individual level or greater risk of crime due to disadvantaged neighborhood conditions. Neighborhood theories describe how structural disadvantage disrupts neighborhood social processes and produces oppositional street cultures. In the article, we advance theorizing on race and crime by linking the neighborhood experience to individual-level decision making via new conceptualizations of culture. Rather than a “values as goals” view of culture, culture may include a “tool kit” of ways to solve problems and this cultural toolkit may, in turn, influence how an individual makes decisions. Specifically, culturally learned toolkits may increase flaws in the decision process (e.g., fast and intuitive rather than deliberate decision processes, the use of decision heuristics) to produce more crime, which would explain the association between race and crime. We integrate this conceptualization of culture and these flaws in the decision-making process into rational choice theory at the individual level and describe how they may be exacerbated in disadvantaged neighborhood contexts. Implications for understanding race and crime and directions for future research are discussed.
... Thus, for Banerjee (2005) the experiment should not be driven on such a theoretical frame, as it shows no clear direction; rather, one should assess specific programs in order to determine what is most effective in the fight against poverty and then build on these insights. In the same vein, Duflo (2006aDuflo ( , 2006bDuflo ( , 2010 and Banerjee andDuflo (2009, 2011) show that prior and explicit theoretical insights are usually misleading and unhelpful: ...
Randomized experiments, as developed by Esther Duflo and Abhijit Banerjee at the Abdul Latif Jameel Poverty Action Lab (J-PAL), offer a novel, evidence-based approach to fighting poverty. This approach is original, in that it imports the methodology of clinical trials for application in development economics. This paper examines the analogy between J-PAL’s field experiments in development economics and randomized controlled trials (RCTs) in medicine. RCTs and randomized field experiments are commonly treated as identical, but such treatment neglects some of the major distinguishing features that make each experiment specifically apt for use in its respective field. The central claim of this paper is that the analogy between medicine and development economics is incomplete because the central dimensions of RCTs are not simply different but altogether lacking in J-PAL’s approach. This weakens both the political and the theoretical power of such experiments in development economics.
... For example,Schultz (1964) andLewis (1966). SeeBertrand, Mullainathan, and Shafir (2004) andDuflo (2006) for more recent perspectives. ...
We study the effect of financial resources on decision-making. Low-income U.S. households are randomly assigned to receive an online survey before or after payday. The survey collects measures of cognitive function and administers risk and intertemporal choice tasks. The study design generates variation in cash, checking and savings balances, and expenditures. Before-payday participants behave as if they are more present-biased when making intertemporal choices about monetary rewards but not when making intertemporal choices about non-monetary real-effort tasks. Nor do we find before-after differences in risk-taking, the quality of decision-making, the performance in cognitive function tasks, or in heuristic judgments.
... In Duflo's case, despite connections with behavioural psychology, 2 there is no systematic behavioural theory (see the only paper addressing directly this issue 'Poor but rational?': Duflo, 2003). Duflo's line may be typical of new trends towards statistical empiricism within mainstream economics, far from the 'high theory' associated with general equilibrium theory. ...
This contribution aims at an original comparison of development analysis with Elinor Ostrom and Esther Duflo from a methodological standpoint, scrutinising their relationship to theory and their operative research strategies. Both perspectives are investigated as case studies for a broader discussion about significant trends in economics and social sciences. Duflo and the J-PAL's approach illustrates – in its own way – new trends and some blind alleys in contemporary forms of mainstream economics, whereas Ostrom and the Bloomington school point towards the marked theoretical and methodological reflexivity of institutionalism, its sensitivity to historical diversity and openness towards social sciences. Distinct social philosophies and episteme are at stake displaying a great divide between two brands of realism and pragmatism, two relationships to development, expertise and knowledge. The paper also contrasts Duflo's methodological monism and mechanistic piecemeal analysis with Ostrom's methodological pluralism and adaptive complex systems analysis.
... Research examining the effects of economic scarcity in economics and psychology, and the policy implications associated with it, has been dominated by two competing perspectives (Bertrand et al., 2004(Bertrand et al., , 2006. The first views people as rational decision-makers adapting to their idiosyncratic circumstances-i.e., they behave rationally bounded within the constraints of their situation (Duflo, 2006). Under this approach, there would be little reason to develop a differential psychology of poverty since people experiencing economic scarcity should act and choose rationally. ...
Due to current economic circumstances (e.g., stagnating wages, increasing material aspirations, mounting student debt), an increasing number of employees are prone to experiencing economic scarcity, defined here as the perception that one has fewer financial resources than one's needs require. In this paper, we focus primarily on an under-studied population in the organizational sciences: The working poor-employees who hold jobs but do not earn enough to sustain a reasonable standard of living for themselves and their dependents. Taking into account recent research suggesting that scarcity can have profound psychological consequences, we argue that organizations have a vested interest in reducing feelings of financial deprivation among its employees because the psychology of scarcity has the potential to spill over into organizational functioning. Furthermore, we assert that most organizations' approaches to managing low-wage work are not only ineffective at reducing the spillover effects of scarcity on organizational outcomes, but also increase their endurance because they do not account for the behavioral consequences of financial deprivation. As such, we present more sustainable initiatives through which organizations can reduce scarcity among its employees. Finally, we discuss ways in which organizational researchers can become more involved in relevant public policy debates.
... The best known statement of this view is Schultz's phrase "poor but rational." Modern development economics has extended this view to what Duflo (2006) calls "poor but neoclassical" by studying various frictions that impede the smooth functioning of markets as well as technological nonconvexities that make it disadvantageous to be poor or operating at very low scales. We lump these together and call them "external frictions" (along with frictions that arise from poor governance, infrastructure, etc.) that prevent the poor from making the best use of their endowments through exchanges in the marketplace or through technology. ...
In this paper we provide a conceptual overview of alternative mechanisms leading to poverty traps at the individual level,
making a distinction between those that are due to external frictions (e.g., market failure), and those that are due to behavior
under extreme scarcity in the absence of any frictions. We develop a common theoretical framework to examine alternative scenarios,
characterizing conditions under which poverty traps (in the sense of multiple stable steady states) arise, as opposed to (possibly,
conditional) convergence to a unique steady state. We apply this framework to discuss the relative merits of alternative anti-poverty
policies, such as unconditional and conditional cash transfers, and direct interventions aimed at improving market access
to the poor or improving public service delivery.
... The channels through which perceived financial difficulties may affect future income poverty may be found in the recent and growing literature on the behavioural economics approach to poverty (Bertrand et al., 2004;Duflo, 2006). Departing from the standard neoclassical approach, the behavioural approach to poverty suggests that "poverty changes the set of options available to individuals. ...
... We suggest that the material and broad-ranging macro-level social constraints imposed on economic actors in impoverished LDC contexts renders particularly salient the question of local actor participation, on the part of both market actors and the NGOs who attempt to assist them. Embedded agency is especially consequential in economic markets because individual actors are forced to rely less on state and market infrastructure support, and the embedded actors' activities and interpretations in seeking novel and unknown market opportunities may have potentially life-threatening implications for individuals' economic well-being (Duflo, 2006). If actor agency, defined as greater individual initiative and control over one's actions (McKague & Oliver, 2012), is important in these contexts, then constructing social spaces within which agency can be usefully exercised is, in our view, an important element of effective market development. ...
Motivated by the question of how to develop viable new markets and value chains in the resource constrained settings of least developed countries, we adopted multi-year qualitative methods to examine the intervention of a nongovernmental organization (NGO) in developing the dairy value chain in Bangladesh. Consistent with the theoretical premise that markets and value chains are social orders, we found that the NGO’s success relied on building the social structure of a market, wherein market participants could negotiate relationships and norms of production and exchange and embed them in practices and technologies. To establish social structure among participants as a means of market building, the NGO acquired relevant knowledge then used contextual bridging (transferring new meanings, practices and structures into a given context in a way that is sensitive to the norms, practices, knowledge and relationships that exist in that context), brokering relationships along the value chain (facilitating introductions and exchanges between value chain members), and funding experimentation (providing resources to test ideas and assumptions about new market practices). Market participants themselves also contributed to the development of the market’s social structure by means of social embedding (building relationships and negotiating norms of exchange and coordination); and material embedding (implementing technologies and practices and integrating market norms into technology). Increased productivity and equity and reduced costs of transactions resulted from the creation of a social structure, which in this case, preceded and enabled the economic structuring of a market, rather than the other way around.
... Productivity studies ignore factor-specific technical change A L and A K The impossibility of an efficient market-based allocation system Perfect credit market are inconsistent with free riding Cost of credit is inversely related to wages It is expensive to be poor The very poor cannot be accountable, i.e., the cost of credit is infinite for them The very poor need a welfare transfer to compensate for very low marginal product (safety net) Excluding lumps sum transfer, the need for transfer distorts the allocation of labor, hence introduces economic inefficiency (Duflo 2003 ...
... Así, es la microeconomía convencional aquella disciplina que más expuesta se ha visto a la evidencia empírica acumulada por la Economía del Comportamiento. 3 Otras áreas, como la Economía Financiera (Shleifer, 2000, Bernatzi y Thaler, 2004, Zaleskiewicz, 2006, la Economía Laboral (Berg, 2006, Bewley, 2007, la Economía del Desarrollo (Mullainathan, 2007, Duflo, 2006, la Economía de la Salud (Frank, 2007) o la Economía Industrial (Camerer y Malmendier, 2007). Por supuesto, la Economía Pública no ha permanecido ajena a los desarrollos de la Economía del Comportamiento, viéndose influenciada en diversas dimensiones, que se describen con mayor detalle en el siguiente apartado. ...
Resumen En el presente trabajo se describen los principales elementos de una experiencia docente consistente en la elaboración de una unidad didáctica sobre las aplicaciones de la Economía del Comportamiento a la Economía Pública. En concreto, se revisan las consecuencias para el diseño de diversas políticas públicas de considerar que los agentes económicos no son totalmente egoístas, no poseen una racionalidad perfecta y experimentan problemas de autocontrol. Las aplicaciones fundamentales discutidas en la unidad didáctica se refieren a la conveniencia de la utilización de incentivos monetarios en ciertas situaciones, el diseño de las políticas de ahorro y pensiones y las políticas relativas al mercado de las drogas.
... Furthermore, people's ability to produce and generate income depends, in large part, on the success of the markets. Given that markets can often be unreliable (e.g., economic recessions, market failures), people's ability to earn income can be limited in ways beyond their control (Duflo, 2006). Cash distributions are thus an important policy for alleviating poverty. ...
Increasingly, psychological theory and research are used to help design and guide social policy efforts. One particular antipoverty policy that is gaining popularity is conditional cash transfers (CCTs), where cash is transferred to needy households, conditioned on their making prestipulated investments in their children's health and education. CCTs have been rigorously evaluated and implemented as policy by governments in several countries. Outside of neoclassical and behavioral economics, there has been a relative lack of formal theoretical grounding in the design of CCTs and in adaptations of the policy. This limits the ability of researchers to estimate program impacts, comprehend the full range of effects, and understand why a particular program fails to be effective. This also limits the ability of policymakers to design CCT programs optimally. As a first step in developing a more comprehensive theoretical framework for CCTs, this article presents a model and theory of change based in a select, but diverse, array of psychological theories (self-efficacy theory, self-determination theory, and bioecological systems theory) for how CCTs may operate to affect families and child development. This model focuses on potential mediators and moderators, and on a broader set of child outcomes that should be considered for future CCT program design, adaptation, and evaluation. (PsycINFO Database Record (c) 2013 APA, all rights reserved)
The Productive Safety Net Program (PSNP) was launched by the government of Ethiopia in 2005 to support food-insecure rural households. In this paper, we evaluate the impact of PSNP on children's educational aspirations and actual attainments. We use longitudinal data from the Ethiopian sample of the Young Lives' survey and by means of a differences-in-differences, individual fixed-effects estimator, we find that the program increases both educational aspirations and actual attainment of children. In our preferred specification, the immediate effect (after 3 years) of the program is to increase by 1.05 years of educational aspirations and by about 0.35 years actual education of children. Furthermore, there is evidence that the program has significant effect even in the long run (after 6 years). The results point to broad and long-lasting positive effects on children education of a program designed primarily to relieve chronically poor households from food insecurity.
Smallholder agriculture in sub‐Saharan Africa is commonly characterised by high levels of technical inefficiency. However, much of this characterisation relies on self‐reported input and production data, which are prone to systematic measurement error. We show theoretically that non‐classical measurement error introduces multiple identification challenges and sources of bias in estimating smallholders' technical inefficiency. We then empirically examine the implications of measurement error for the estimation of technical inefficiency using smallholder farm survey data from Ethiopia, Malawi, Nigeria and Tanzania. We find that measurement error in agricultural input and production data leads to a substantial upward bias in technical inefficiency estimates (by up to 85% for some farmers). Our results suggest that existing estimates of technical efficiency in sub‐Saharan Africa may be severe underestimates of smallholders' actual efficiency and what is commonly attributed to farmer inefficiency may be an artefact of mismeasurement in agricultural data. Our results raise questions about the received wisdom on African smallholders' production efficiency and prior estimates of the productivity of agricultural inputs. Improving the measurement of agricultural data can improve our understanding of smallholders' production efficiencies and improve the targeting of productivity‐enhancing technologies.
The Green Revolution still exerts an important influence on agricultural policy as a technology-centred development strategy. A main policy narrative underpinning the Green Revolution was first expounded in Transforming Traditional Agriculture (TTA), a book published in 1964 by Nobel Prize-winning economist Ted Schultz. He famously argued that traditional farmers were ‘poor but efficient’. As farmers responded to economic incentives, technology-driven strategies would transform traditional agriculture into an engine of economic growth. Schultz relied on published ethnographic data and his own calculations to construct this policy narrative. My reanalysis of TTA focuses on its main case study, Panajachel, a village in Guatemala. I follow a narrative approach, evaluating whether Schultz’s story relates a plausible account of agricultural development in Panajachel and its region. I show how Schultz deliberately tried to hide that Mayan farmers in Panajachel were not challenged in technological terms and were able to reach relatively high economic returns. His interpretation of the Guatemalan rural economy ignored ethnic tensions dominating market exchange, a main barrier for agricultural development. I evaluate Schultz’s narrative further by tracing the subsequent evolution of Panajachel and its wider region. High-input strategies had to address ethnic barriers and change agents became embroiled in violent conflict along ethnic lines. Assessing the adequacy of Schultz’s contribution, from a narrative approach, shows how he ‘got the story wrong’ and that the Green Revolution policy narrative has an excessively narrow intellectual basis. New narratives should reserve a much more important place for institutional change in agricultural development.
This paper discusses how climatic and non-climatic factors, either separately or together, shape the adaptation responses of smallholder farmers in the Raya Azebo district of Ethiopia. Their adaptation responses include adjusting planting periods, crop diversification, changing crop types, adopting improved seeds, using irrigation, conducting migration, participation in wage employment, selling local food and drinks, and owning small shops. We found that these adaptation responses were motivated by various climatic (e.g., drought and rainfall variability) as well as non-climatic factors (e.g., market conditions, yield-related factors, land scarcity, labor shortages, soil fertility issues, crop diseases, and limited local employment options). We therefore argue (i) that successful adaptation requires a broader understanding not just of climatic factors but also of the various social-ecological factors that shape smallholder farmers' adaptations; and (ii) that the successful design and implementation of locally appropriate planned climate adaptation require the inclusion of both climatic and non-climatic factors.
In the early 1960s, the agricultural economist Theodore W. Schultz issued a critical assessment of the prevailing tenets of development economics in Transforming Traditional Agriculture. Aimed at educated bureaucrats rather than academic economists, he proposed no new development theories. Instead, he drew inferences from statistics in case studies to argue that no special economic theory was required in the development space. He packaged these studies as statistical parables to provoke skepticism of development theory among those involved in direct technical assistance in developing countries. Drawing partly on their long experience with US and Soviet agricultural modernization, Schultz and members of his agricultural economics group at the University of Chicago used suggestive empirical evidence to stress the importance of investment in human capital in economic growth. By appealing to government administrators in both the United States and developing countries, Schultz helped shift development policies toward state-supported technical assistance, public education, and market-oriented policies for the agricultural sectors in the global South.
The diffusion of new technology is an important driver of agricultural development, especially in the developing world. In this research, we follow the persistence of major historical events, employing a difference-indifferences method to carefully examine the long-term effect of China's 1959-1961 famine on farm households' current decisions to adopt technology. Further, we combine a mediating regression procedure with a bootstrap method to explore the mechanism of impact in this relationship. Overall, this study provides strong empirical evidence that the Great Famine attenuated technology adoption; moreover, a 1% increase in exposure to famine in childhood and adolescence resulted in a 0.137% decrease in the probability of technology adoption when controlling for village dummies. An analysis of mediating effects reveals that risk preferences account for the channel of famine persistence.
This paper investigates whether aspirations matter for education, which offers a common route out of poverty. We find that mother aspirations are strongly related to the child’s grade achieved at age 18. The relation is nonlinear, suggesting there is a threshold, and depends on caste, household income and the village setting. The coefficients remain large and significant when applying control function estimation, using first born son as instrument. A similar strong relation is observed with learning outcomes, including local language, English and maths test results, and with attending school, but not with attending private education. These results are confirmed for outcomes at age 15. The findings provide direct evidence on the contribution of mother aspirations to children’s education outcomes and point to aspirations as a channel of intergenerational mobility. They suggest that education outcomes can be improved more rapidly by taking aspirations into account when targeting education programmes, and through interventions that shape aspirations.
The goal of this research is to explore whether actual lottery revenues are sensitive to economic scarcity, as measured by intra-monthly stock of financial resources. Paydays of social security benefits are employed in this study to generate the various degrees of intra-monthly scarcity in financial resources. Using two million observations on daily lottery revenues that cover more than 2,500 lottery outlets in Israel over two years (2015–2016), the empirical analysis suggests that gambling revenue spikes at social security paydays. The estimation results imply that on income support payday aggregate lottery revenues are higher by 5% after taking into account potential determinants of gambling such as day of week, holidays and outlet characteristics. However, the calculated aggregate reaction of lottery revenues on income support payday is quite small and equals 0.5% of the total monthly payments deposited into the bank accounts of income support recipients. In addition, the other social security and salary paydays induce a trivial impact, relative to total monthly payments deposited into the bank accounts of the respective recipients. The findings presented here provide a valuable contribution to gambling studies that examine the relationship between economic conditions and lottery.
In the last 20 years, the drive for evidence‐based policymaking has been coupled with a concurrent push for the use of randomized controlled trials (RCTs) as the “gold‐standard” for generating rigorous evidence on whether or not development interventions work. Drawing on content analysis of 63 development RCTs and 4 years of participant observation, I provide a rich description of the diverse set of actors and the transnational organizational effort required to implement development RCTs and maintain their “scientific status.” Particularly, I investigate the boundary work that proponents of RCTs—also known as randomistas—do to differentiate the purposes and merits of testing development projects from doing them, as a way to bypass the political and ethical problems presented by adopting the experimental method with foreign aid beneficiaries in poor countries. Although randomistas have been mostly successful in differentiating RCTs from the projects evaluated, I also examine cases where they were not able to do so, as a means to highlight the controversies associated with implementing RCTs in international development.
Improving productivity among farm enterprises is important, especially in low-income countries where market imperfections are pervasive and resources are scarce. Relaxing credit constraints can increase the productivity of farmers. Using a field experiment involving in Bangladesh, we estimated the impact of access to credit on the overall productivity of rice farmers, and disentangled the total effect into technological change (frontier shift) and technical efficiency changes. We found that relative to the baseline rice output per decimal, access to credit resulted in, on average, approximately a 14 percent increase in yield, holding all other inputs constant. After decomposing the total effect into the frontier shift and efficiency improvement, we found that, on average, around 11 percent of the increase in output came from changes in technology, or frontier shift, while the remaining 3 percent was attributed to improvements in technical efficiency. The efficiency gain was higher for modern hybrid rice varieties, and almost zero for traditional rice varieties. Within the treatment group, the effect was greater among pure tenant and mixed-tenant farm households compared with farmers that only cultivated their own land.
Capacity building has been considered as a cornerstone of African development for the last six decades. Therefore, the international institutions for development and the governments of Africa have provided a huge amount of financial resources for capacity building during that period of time. Unfortunately, the results of such approach of development have been disappointing to some extent. While one should acknowledge that an economic transformation has been in progress in Africa, many African countries are still struggling with poverty. Some experts of international development have been persistently pointing now the issue of mindset as a serious impediment to the success of capacity building programs in Africa and as such as a major obstacle for a sustainable development of the continent. One has to admit that the issue of mindset has not been taken into consideration in the programs of capacity building implemented in Africa for the last few decades. Yet the mindset is a key determinant in the success or failure of any human initiative. In many African countries, the issue of mindset can explain to a significant extent the weakness of institutions, the political instability, and the uncertainty of the environment. The purpose of this paper is to draw the attention of international institutions for development and policymakers on the importance of mindset in the poor performance of capacity building programs in Africa and most importantly to explore strategies of mindset transformation in order to facilitate more effective capacity building programs and a sustainable development in African countries. Therefore, in its first part, this chapter will point out some critical facts that reflect the imperative necessity of mindset transformation in Africa. In its second part, this chapter will use some theories of mindset to explain some current development issues related to mindset in Africa but also to enlighten the reflection about the mindset transformation in Africa. The third part of the chapter will propose some strategies for mindset transformation in Africa, while the fourth part will be a discussion.
This article brings a historical perspective to explain the recent dissemination of randomized controlled trials (RCTs) as the new “gold standard” method to assess international development projects. Although the buzz around RCT evaluations dates from the 2000s, we show that what we are witnessing now is a second wave of RCTs, while a first wave began in the 1960s and ended by the early 1980s. Drawing on content analysis of 123 RCTs, participant observation, and secondary sources, we compare the two waves in terms of the participants in the network of expertise required to carry out field experiments and the characteristics of the projects evaluated. The comparison demonstrates that researchers in the second wave were better positioned to navigate the political difficulties caused by randomization. We explain the differences in the expertise network and in the type of projects as the result of concurrent transformations in the fields of development aid and the economics profession. We draw on Andrew Abbott’s concept of “hinges,” as well as on Bourdieu’s concept of “homology” between fields, to argue that the similar positions and parallel struggles conducted by two groups of actors in the two fields served as the basis for a cross-field alliance, in which RCTs could function as a “hinge” linking together the two fields.
The two‐fold purpose of this study was to explore the financial capability of low‐income consumers from rural regions of Poland, using Xiao's financial capability index, while accounting for their poverty status, demographic and financial characteristics. To test the relevant hypothesis of the study, a micro database of low‐income consumers was used. Factor, descriptive and correlation analyses were employed for preliminary examinations. One‐way ANOVA was used to examine the impact of different poverty indicators on financial capability index variables. Multiple OLS regressions were used to examine the influence of the selected factors on the level of financial capability. Six sets of linear regression models were used to explore the effects of factors associated with the financial capability variables. The findings of our study suggest that financial inclusion is an essential component of the financial capability index. The results also show that all five variables play a significant role in the financial capability index. Therefore, Xiao's financial capability index captures a specific combination of financial literacy and financial behaviour of low‐income consumers from rural regions of Poland.
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"From perceived control to self-control, the importance of cognitive and emotional resources". Peer commentary on “The behavioural constellation of deprivation: causes and consequences,” by Pepper, G. V., & Nettle, D. Behavioral and Brain Sciences. Forthcoming
This paper assesses the role of informal institutions in determining risk preference among smallholders in Tigray, Ethiopia. We use data from a household survey conducted by the Institute of Poverty Alleviation and International Development (IPAID). We find that households which participate in Debo, an informal labor-sharing institution, or have a friend from whom they can receive help are less likely to be risk-averse. However, participation in Iddir, a traditional form of insurance, is not significantly associated with risk preference. Hence, the existence of social institutions that provide assistance and social connections through reciprocity may be affording security against risk beyond that brought by more monetary forms of insurance. Given the importance of risk attitude in mediating the adoption of improved agricultural production, a policy suggestion is to provide selected aid to households which are less risk-averse agricultural investors. Also, Debo as a labor-sharing institution may serve as a nexus for managing aid and knowledge sharing.
Using market-based pro-poor development policy in the global South as an example, this paper engages with the rise of behaviourism and experimentalism as a challenge to the neoclassical orthodoxy and the more recent transformation into an influential policy script. After charting the rise of behavioural economics and discussing the key conceptual building blocks of the emerging behavioural mainstream in economics, the paper turns to the marketization of anti-poverty policy in the global South. Based on an analysis of policy documents, project reports and academic interventions, it is argued that the behavioural approach to poverty shifts the focus from the market to the market subject and engages in often thinly veiled attempts at behavioural engineering. This is achieved with the combined work of behavioural economic knowledge and socio-technical market devices.
The social, economic, and environmental costs of feeding a burgeoning and increasingly affluent human population will depend, in part, on how we increase crop production on under-yielding agricultural landscapes, and by how much. Such areas have a “yield gap” between the crop yields they achieve and the crop yields that could be achieved under more intensive management. Crop yield gaps have received increased attention in recent years due to concerns over land scarcity, stagnating crop yield trends in some important agricultural areas, and large projected increases in food demand. Recent analyses of global data sets and results from ½eld trials have improved our understanding of where yield gaps exist and their potential contribution to increasing the food supply. Achieving yield gap closure is a complex task: while agronomic approaches to closing yield gaps are generally well-known, a variety of social, political, and economic factors allow them to persist. The degree to which closing yield gaps will lead to greater food security and environmental bene½ts remains unclear, and will be strongly influenced by the particular strategies adopted.
Agriculture is the largest sector in most sub-Saharan economies in terms of employment, and it plays an important role in supplying food and export earnings. Rural poverty rates remain high, and labor productivity is strikingly low. This article asks how these factors shape the role of agriculture in African development strategies. Is agricultural growth a prerequisite for growth in other sectors? Or will urbanization and nonagricultural export markets ultimately be the forces that pull the rural economy into higher productivity? We argue that agricultural development strategies will vary widely because of heterogeneity across and within countries.
This paper tests the effect of limited attention on productivity, nutritional choice and financial decision-making. We design experiments that distinguish between limited attention due to emotional and cognitive load. We find that both emotional and cognitive loads have a negative impact on productivity and food choices. The decrease in productivity is 11 percent, while the share of subjects who choose a unhealthy snack increase by 28 percent under high mental load. In addition, there is evidence of heterogeneity in treatment effects related to gender, age and education.
This paper analyzes the role of wealth distribution in macroeconomics through investment in human capital. It is shown that
in the presence of credit markets' imperfections and indivisibilities in investment in human capital, the initial distribution
of wealth affects aggregate output and investment both in the short and in the long run, as there are multiple steady states.
This paper therefore provides an additional explanation for the persistent differences in per-capita output across countries.
Furthermore, the paper shows that cross-country differences in macroeconomic adjustment to aggregate shocks can be attributed,
among other factors, to differences in wealth and income distribution across countries.
As firms switch from defined-benefit plans to defined-contribution plans, employees bear more responsibility for making decisions about how much to save. The employees who fail to join the plan or who participate at a very low level appear to be saving at less than the predicted life cycle savings rates. Behavioral explanations for this behavior stress bounded rationality and self-control and suggest that at least some of the low-saving households are making a mistake and would welcome aid in making decisions about their saving. In this paper, we propose such a prescriptive savings program, called Save More Tomorrow (hereafter, the SMarT program). The essence of the program is straightforward: people commit in advance to allocating a portion of their future salary increases toward retirement savings. We report evidence on the first three implementations of the SMarT program. Our key findings, from the first implementation, which has been in place for four annual raises, are as follows: (1) a high proportion (78 percent) of those offered the plan joined, (2) the vast majority of those enrolled in the SMarT plan (80 percent) remained in it through the fourth pay raise, and (3) the average saving rates for SMarT program participants increased from 3.5 percent to 13.6 percent over the course of 40 months. The results suggest that behavioral economics can be used to design effective prescriptive programs for important economic decisions.
Household-level panel data from a nationally representative sample of rural Indian households describing the adoption and profitability of high-yielding seed varieties (HYVs) associated with the Green Revolution are used to test the implications of a model incorporating learning by doing and learning spillovers. The estimates indicate that imperfect knowledge about the management of the new seeds was a significant barrier to adoption; this barrier diminished as farmer experience with the new technologies increased; own experience and neighbors' experience with HYVs significantly increased HYV profitability; and farmers do not fully incorporate the village returns to learning in making adoption decisions. Copyright 1995 by University of Chicago Press.
Hyperbolic discount functions induce dynamically inconsistent preferences, implying a motive for consumers to constrain their
own future choices. This paper analyzes the decisions of a hyperbolic consumer who has access to an imperfect commitment technology:
an illiquid asset whose sale must be initiated one period before the sale proceeds are received. The model predicts that consumption
tracks income, and the model explains why consumers have asset-specific marginal propensities to consume. The model suggests
that financial innovation may have caused the ongoing decline in U. S. savings rates, since financial innovation increases
liquidity, eliminating commitment opportunities. Finally, the model implies that financial market innovation may reduce welfare
by providing “too much” liquidity.
We analyze the effect of agricultural tenancy laws that offer security of tenure to tenants and regulate the share of output they should pay the landlord as rent on farm productivity. Theoretically, the net impact of tenancy reform is shown to be a combination of two effects. A bargaining power effect tends to improve the crop-share of tenants and hence improves their incentives in general. A security of tenure effect tends to encourage investment by the tenant on one hand, but on the other hand eliminates the possibility of using eviction threats as an incentive device by the landlord. Analysis of evidence on how contracts and productivity changed after a tenancy reform program was implemented in the Indian state of West Bengal in the late seventies suggests that tenancy reform played an important role in increasing agricultural productivity.
This paper models the dynamics of the earnings distribution among successive generations of workers as a stochastic process. The process arises from the random assignment of abilities to individuals by nature, together with the utility maximizing bequest decisions of their parents. A salient feature of the model is that parents cannot borrow to make human capital investments in their offspring. Consequently the allocation of training resources among the young people of any generation depends upon the distribution of earnings among their parents. This implies in turn that the often noted conflict between egalitarian redistributive policies and economic efficiency is mitigated. A number of formal results are proven which illustrate this fact.
This chapter examines two concepts on poverty: poverty as desperation and poverty as vulnerability. It identifies a close connection between desperation and vulnerability because both are related to the variable V, which is the minimum socially accepted welfare level. It is argued that observable correlates of poverty characteristics should be determined and used as basis of policies.
Various risk sharing arrangements are common in underdeveloped agrarian economies where households have no formal means of contract enforcement and little access to risk markets. Social insurance is still possible through repeated interaction in an environment with few informational asymmetries. In a simple repeated game model of two self-interested households facing independent income streams, we characterize the best arrangement that can be sustained as a noncooperative equilibrium. We establish precisely how this optimal informal arrangement differs from first best-risk sharing, and identify the conditions under which the divergence between the two is greatest.
The "Marshallian" approach assumes a prohibitively hight cost of monitor ing the sharecropper's activities while the "monitoring" approach a rgues that landlords stipulate and effectively monitor sharecroppers' activities. The author presents new evidence using detailed data col lected from eight Indian villages. Most tenants own some land of thei r own; this provides a controlled environment in studying the impact of contractual arrangements. The differences in input and output inte nsities on owned minus sharecropped land of the same household are fo und to be sizable and significant, suggesting a rejection of the moni toring approach and supporting the notion of the "Marshallian produc tive inefficiency" of sharecropping. Copyright 1987 by University of Chicago Press.
This paper models economic development as a process of institutional transformation by focusing on the interplay between agents' occupational decisions and the distribution of wealth. Becau se of capital-market imperfections, poor agents choose working for a wa ge over self-employment and wealthy agents become entrepreneurs who monitor workers. Only with sufficient inequality, however, will ther e be employment contracts; otherwise, there is either subsistence or self-employment. Thus, in static equilibrium, the occupational structure depends on distribution. Since the latter is itself endogenous, the authors demonstrate the robustness of this result b y extending the model dynamically and studying examples in which initi al wealth distributions have long-run effects. Copyright 1993 by University of Chicago Press.
Field research attempted to measure the risky environments, the information structures, the institutions, and the risk-response mechanisms of ten villages in northern Thailand. Various key features are then modeled in an abstract but realistic way, either with a full-information risk-sharing model or an information-constrained version of the same model. Observations from some of the villages seem consistent with one or the other of these models but, in many of the villages, one is left with risk-response variations across households which suggest that Pareto improvements are possible. Copyright 1995, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
This article addresses the issues of incomplete markets and imperfect information in the context of credit markets in rural
northern Nigeria. In much recent theoretical literature, the problems of moral hazard and adverse selection are assumed to
be decisive for the organization of agrarian institutions. In contrast, it is found that in the four villages surveyed credit
transactions take advantage of the free flow of information within rural communities. Information asymmetries between borrower
and lender are unimportant, and their institutional consequences—the use of collateral and interlinked contracts—are absent.
Credit transactions play a direct role in pooling risk between households through the use of contracts in which the repayment
owed by the borrower depends on the realization of random production shocks by both the borrower and the lender.
Corruption in the public sector erodes tax compliance and leads to higher tax evasion. Moreover, corrupt public officials abuse their public power to extort bribes from the private agents. In both types of interaction with the public sector, the private agents are bound to face uncertainty with respect to their disposable incomes. To analyse effects of this uncertainty, a stochastic dynamic growth model with the public sector is examined. It is shown that deterministic excessive red tape and corruption deteriorate the growth potential through income redistribution and public sector inefficiencies. Most importantly, it is demonstrated that the increase in corruption via higher uncertainty exerts adverse effects on capital accumulation, thus leading to lower growth rates.
In Côte d'Ivoire, as in much of Africa, husbands and wives farm different crops on separate plots. These different crops are differentially sensitive to particular kinds of rainfall shocks. We find that conditional on overall household expenditure, the composition of expenditure is sensitive to the gender of the recipient of a rainfall shock. For example, rainfall shocks associated with high women's income shift expenditure towards food. Social norms constrain the use of profits from yam cultivation, which is carried out by men. Correspondingly, we find that rainfall-induced fluctuations in income from yams are transmitted to expenditures on education and food, not to expenditures on private goods. We reject the hypothesis of complete insurance within households, even with respect to publicly observable weather shocks. Different sources of income are allocated to different uses depending upon both the identity of the income earner and upon the origin of the income.
Arrangements for achieving efficient risk-sharing vary depending on the information available to agents in the economy. The
usual Euler equation restricts efficient allocations in an economy which obeys the permanent income hypothesis, while efficient
allocations in an economy with private information and long-term contracts satisfy a symmetric restriction, but not the Euler
equation. Full insurance arrangements are unique in that they satisfy both restrictions.
We look at an environment in which it seems likely that long-term contracts play a role in mitigating the effects of private
information: three village economies in South India. The evidence that consumption allocations satisfy the private information
restriction is quite strong for households in two of the three villages; the evidence for the third village suggests that
while consumption for some households satisfies the private information restrictions, other households' consumption obey the
permanent income hypothesis.
With decreasing returns and first-best credit, the long-run interest rate and aggregate output are uniquely determined, and
wealth dispersion among individuals or firms is irrelevant. Introducing credit rationing into the Solow model modifies these
conclusions. Multiple stationary interest rates and wealth distributions can exist because higher initial rates can be self-reinforcing
through higher credit rationing and lower capital accumulation. The wealth accumulation process is ergodic in every steady
state, but wealth mobility is lower with higher steady-state interest rates. Aggregate output is higher in steady states with
lower interest rates because credit is better allocated. Short-run interest rate or distribution shocks can be self-sustaining
and can have long-run effects on output through the induced dynamics of the wealth distribution and credit rationing.
The hypothesis of full risk sharing can be taken to data from low-income countries and evaluate formal and informal financial systems. In many contexts, idiosyncratic risks are high, so credit/insurance arrangements could be beneficial. Statistical tests reveal that households in southern India take advantage of these possibilities; villages in Cote d'Ivoire and countries in Thailand do not do as well. The paper includes an empirical description of the devices used to smooth consumption and a theoretical discussion of private information and incentives on ideal operating systems. The full information and mechanism design frameworks provide benchmarks for policy analysis. Copyright 1995 by American Economic Association.
The full insurance model is tested using data from three poor, high-risk villages in the semi-arid tropics of southern India. The model presented here incorporates a number of salient features of the actual village economies. Although the model is rejected statistically, it does provide a surprisingly good benchmark. Household consumptions comove with village average consumption. More clearly, household consumptions are not much influenced by contemporaneous own income, sickness, unemployment, or other idiosyncratic shocks, controlling for village consumption (i.e., for village-level risk). There is evidence that the landless are less well insured than their village neighbors in one of the three villages. Copyright 1994 by The Econometric Society.
This paper develops a model of growth and income inequalities in the presence of imperfect capital markets, and it analyses
the trickle-down effect of capital accumulation. Moral hazard with limited wealth constraints on the part of the borrowers
is the source of both capital market imperfections and the emergence of persistent income inequalities. Three main conclusions
are obtained from this model.
First, when the rate of capital accumulation is sufficiently high, the economy converges to a unique invariant wealth distribution.
Second, even though the trickle-down mechanism can lead to a unique steady-state distribution under laissez-faire, there is
room for government intervention: in particular, redistribution of wealth from rich lenders to poor and middle-class borrowers
improves the production efficiency of the economy both because it brings about greater equality of opportunity and also because
it accelerates the trickle-down process. Third, the process of capital accumulation initially has the effect of widening inequalities
but in later stages it reduces them: in other words, this model can generate a Kuznets curve.
This paper develops the stochastic theory of distribution with a dynamic model which focuses on the role of incomplete insurance
in generating inequality. Unlike previous work, our approach takes explicit account of the reason for market incompleteness
in modeling agents' behaviour; in particular, the amount of risk borne is endogenous. Using a model of growth with altruism
in which agents are risk-averse and there is moral hazard, we show that lineage wealth follows a Markov process which converges
globally to an ergodic distribution; this also represents the long-run population distribution of wealth. We discuss the role
of particular assumptions, such as availability of production loans and unboundedness of utility, in yielding the qualitative
properties of the distribution of wealth, the choice of “occupation” and the prevention of poverty traps.
One way that risk-averse households protect consumption levels is to borrow and use insurance mechanisms. Another way, common in low-income economies, is to diversify economic activities and make conservative production and employment choices. Households thus tend toward limiting exposure only to shocks that can be handled with available credit and insurance. Typically, both types of mechanisms are studied independently but much more can be learned by studying them together. First, we obtain a more complete picture of risks, costs, and insurance possibilities. Second, it opens the way to considering biases in standard tests of credit and insurance. Copyright 1995 by American Economic Association.
It is not clear that the evident behavioral differences between the poor and everyone else - the poor save less and are less likely to become entrepreneurs, for example - arise from differences in preferences and abilities or instead from differences in the economic environment. An insight from the recent literature on incentives is that a similar case can be made without reference to any distinctive behaviour traits of the poor; it relies simply on the fact that the poor are closer to the lower bound on their utility than the rest of the population. Consequently, threats of punishment work less well against the poor than against others: the poor behave as if they have nothing to lose. The poor then find it harder than everyone else to borrow and insure, and that in turn makes them behave differently. The authors study this point in the context of an investment problem. The following sections use the idea to develop models of poverty traps. -from Authors
Group formation in rish sharing arrangements.' Mimeo, Irivine, Forthcoming in Review of Economic Studies
- Garance Genicot
- Debraj Ray
Genicot, Garance, and Debraj Ray (2002) 'Group formation in rish sharing arrangements.'
Mimeo, Irivine, Forthcoming in Review of Economic Studies
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