psychology of poverty sendhil mullainathan. overview design of redistribution programs specific...

Psychology of Poverty

Sendhil Mullainathan

Overview

Design of Redistribution Programs

Specific Psych of Poverty: Temptation tax

Specific Psych of Poverty: Packing Problem

Transfer policy: Behavioral lens

Delivery How do individuals engage participation decisions? E.g., defaults and 401(k)s

Design What problems do benefits leave in hands of

recipients? E.g., food stamps and planning problem

Disincentives How do individuals respond to program incentives? E.g., TANF time limits and commitment

Transfer policy: Design

Benefits need to take a form that is useful to individuals Rational model:

Cash is best, people can smooth benefits over time, etc.

PDV of benefit really all that matters Behavioral model:

Complexity and planning Smoothing and self-control

Transfer policy: Meeting Needs

Food stamp example (Shapiro 2005)

Want benefits to translate to improved nutrition Big to small problem, limits to self-control Declining nutrition over month

“Give it to us in two installments. At the end of the month I'm dying [for money]. If you got it on the 1st and 15th, or whatever, it would be so much better. Checks or coupons, it doesn't matter, either way, but it does not last a month. The second part of the month is always a struggle.”

An example: meeting preferences

• Timing of EITC

• Lump sum vs. advanced• Want income to translate to consumption• Commitment device?

Disincentives

Provide benefits without distorting incentives (or even while reinforcing desirable incentives)

Work incentives a particular concern Rational model:

Programs like TANF create a moral hazard Government interests, recipient interests at

odds Create restrictions, e.g., time limits

Behavioral model:

Program incentives mediated by psychology Incentives interact with, e.g., self-control Recipients act on incentives as construed

False Fear of Moral Hazard

Fear of moral hazard inhibits redistribution Suppose however that b < c for most b but β(b) <

c for behavioral types Driving without a helmet Teen pregancy

Those who engage in behavior are behavioral Transfer of min(b)-c would induce no moral hazard

Note: existence of those doing it leads to misestimation of f(b) type distribution under assumption of rationality

Construal of Incentives

Eissa and Hoynes (2004): “A consistent and somewhat puzzling finding in the empirical literature on the EITC and labor supply is the large response of the participation decision and the lack of any response by the reported hours worked by taxpayers in the labor force.”

Some evidence that people do not understand marginal incentives: information “induce[s] treated clients to increase their EITC refunds by choosing an earnings level closer to the peak of the EITC schedule. Clients treated by complying tax professionals are 10% less likely to have very low incomes than control group clients.” Chetty and Saez (2009)

Interesting possibility: Assume can still work and get benefits, but do not

understand marginal and therefore hours substitution Behavioral tagging: can transfer to these types without

affecting (hours) incentives

Behavioral Tagging

Direct implication of above Ironically bad behaviors present redistribution

opportunities with little cost Must still worry about elasticity of behavioral type Note: problem is simpler if behavioral type were

known to be correlated with b Then these behaviors themselves are a poverty tag

Note contrast between arbitrage for welfare benefits vs. schooling

AFDC

Behavioral Tagging

UI: Transfers to deal with loss aversion in job search Threat of Re-employment services

Black et. al. estimate that the program reduces mean weeks of UI benefit receipt by about 2.2 weeks, reduces mean UI benefits received by about $143, and increases subsequent earnings by over $1,050. Most of the effect results from asharp increase in early UI exits in the treatment group relative to the control group.

More fine-grain incentives for inputs (resumes sent) rather than outputs

Key insight: incentives can match the behavioral type

Benefit of Behavioral Tagging

In some cases: Transfer without fear of moral hazard Low types are behavioral

In other cases: Undo what appears to be “moral hazard” without

giving up insurance High types are behavioral

Incentives and Self-Control

TANF time limits Serve as a commitment device (Fang and

Silverman 2004) Interests of policymakers and recipients align

Moral hazard confounded with behavioral tendencies Moral hazard is not the only mechanism for

disincentives Benefits can induce, indulge procrastination Some behaviors are more likely to be evidence of

behavioral tendencies than moral hazard (e.g., teen pregnancy)

Transfer policy: Design

Need more research on demonstration projects and evidence on Cash transfers or structured transfers? Moral hazard or procrastination?

Understanding could lead to transfer programs with much less moral hazard.

Potential for more efficient transfers. Need more research, evidence, data

Overview




Aside: Two Ways to Apply Psychology Same psychology we always apply

A different “twist” on the same psychology

Vegetable Vendors – Stark Example

Simple production function Purchase fruit in the early morning Sell through day

Basic working capital needs

Fruit Vendor

Vendors

Simple production function Purchase fruit in the early morning Sell through day

Basic working capital needs

Vendors

Table 1-Business Characteristics of sample population Detail Percentage of

respondents Average amount purchased*

Profits per day*

1. One trip a day to the market- normal days

89.7% Rs. 1075.3 (589.2)

Rs.110.5 (54.7)

2. twice or more trips a day( total amount purchased per day)

8 % Rs.707.5 (422.6)

Rs.95.6 (46.1)

3. once in two days trip to the market (amount purchased per trip)

2.3% Rs. 1034.8 (515.8)

Rs.97.2 (44.3)

4. good days a week 98.9% Rs. 1666.3 (834.3)

Rs. 186.6 (83.4)

5. festival days 91.5% Rs. 2580.7 (1543.7)

Rs. 318.2 (187.3)

Vendors

Table 3- Meter loans for financing

1. % of sample size that takes daily loans 69.4%2. % of sample size that takes daily loans for more than 15 days a month 65.7%

3. average number of days in a month that respondent takes a daily loan for working capital

25.8 days

4. average number of years of taking daily loans 9.5 years

5.average daily interest rate 4.9%6. % of total meter loan borrowers who borrow from the same moneylender

daily67.7%

7. Average of maximum that can be borrowed as a daily loan Rs. 4098.6

8. % of meter loan borrowers who feel there is no other way of doing business and the interest is unavoidable

63.8%

Vendors

Persistent borrowers At very high rates Stark implication:

One less cup of tea a day. In 30 days will have doubled income.

Significant foregone income Is this a rationale for consumer protection?

Tempted to debt?

Related Puzzles

The poor borrow at very high rates Poor appear to have very high return

investments which are divisible Fertilizer (Duflo, Johnson, Kremer) Capital drops diMel, McKenzie and Woodruff

Paying off high interest rate debt is a special case

Generally the poor appear more myopics

Implications of high interest rate

Discount future heavily (δ low) or Future marginal utility large relative to today

Consumption growth large u’(ct+1) low so ct+1 high Note: this is stronger than saying that marginal product

of capital is high. Some existing studies suggest this as well.

Particularly sensible for transitory shocks (e.g. health). But examples span even working capital uses (e.g. crop

finance)

)(')(' 1 tt cuRcu

Understanding Poverty

To fit these facts current models must assume

Poor are very myopic or

Poor are quickly becoming non-poor

Since the latter appears counter-factual, we are forced to conclude the former

How to incorporate psychological insights? Time inconsistency obviously helpful in resolving

myopia tension Standard model conceptualizes it as δ low

Present bias literature suggests more nuanced view Individuals have inconsistent time preferences Can be both myopic and farsighted

Two ways to incorporate time inconsistency Constant time-inconsistency Inconsistency problems which vary with income

Need simple framework to do both

Model of Self-Control

Time inconsistency often conveniently measured in money

But fundamentally it must be about consumption preferences. Tomorrow’s self wants to consume more than today’s

self wants him to Tomorrow’s self wants to consumer more X than

today’s self wants him to Cigarette smoking Sleep in the clocky example Unhealthy foods

Choosing Movies

Subjects given opportunity to choose a movie video from a set of 24 titles Four Weddings and a Funeral Schindler’s List

When choosing for today: 56% choose low-brow

When choosing for next Monday, 37% choose low-brow

When choosing for second Monday, 29% choose low-brow

Read, Loewenstein & Kalyanaraman (1999)

Temptation goods

Small modeling deviation: Temptation not just about how much to

consume today but what to consume today Easier to model how temptation changes with

income if we explicitly allow for temptation goods

Can talk about whether temptation goods are non-normal goods

Will assume “sophistication” in consumption Not essential to our analysis

Set Up

Two periods in most examples Two types of index goods: x and z

x consumption: no time inconsistency z consumption: only present selves like it Instantaneous utility in each period u(x) + v(z)

Period 1’s decision utility:

Income each period yt and initial wealth w0

Production function f(). Sometimes for simplicity will just assume rate of return R

Will assume “sophistication” in consumption

€

u(x1) + v(z1) + δu(x2)

Aside: Modeling Temptation

We can think of this in a more general way. Let c be a vector of consumption goods

Two utility functions uF(c) and uT(c) be forward looking and temptation utilities. So individuals maximize

Result: Can define indices x(c) and z(c) and utility functions u(x) and v(z) so that the individual consumption maximization is represented by the maximization over how much to spend on x and z.

Key observation Goods’ temptation can vary with level of consumption

€

uT (v c 1) + δuF (

v c 2) + δ 2uF (

v c 3) +L

€

u(x(v c 1)) + v(z(

v c 1)) + δu(x(

v c 2))

Assumptions

Two periods in most examples Two types of index goods: x and z

x consumption: no time inconsistency z consumption: only present selves like it

Instantaneous utility in each period u(x) + v(z) Period 1’s decision utility:

Income each period yt and initial wealth w0

Production function f(). Sometimes for simplicity will just assume rate of return R

)()()( 211 xuzvxu

Generalized Euler Equation

Traditional Euler Equation:

Generalized Euler Equation

Temptation tax: Every dollar transferred into the future is “taxed” by

temptations; future selves will waste some of it.

)(')(')(' 1 ttt cuwfcu

)]('1)[(')(')(' 11 tttt czcuwfcu

Poverty and Myopia

Two forms of “myopia”: δ and z’(w) Original puzzle

Third explanation: myopia in the form of high z’(w). Why is this different?

Because z’(w) can vary systematically with w Individuals can control the value of z’(w) they face and

hence the tax. All our results come from this.

These considerations that traditional estimations of discount rates be biased

Relation to Hyperbolic Model

Special case in more general model where

So a special case is

In the more specific formulation€

uT (c) = βuF (c)

€

u(x) = β ˜ u (c) and v(z) = (1− β ) ˜ u (c)

€

u(x t ) =x t

1−α

1−αv(zt ) = A

zt1−α

1−α

The shape of temptation

Two important cases: z’(c) constant (Non Declining temptation)

Rich and poor face similar time inconsistency problems

Includes case of z’(c) = 0 z’(c) declining

Rich face less time inconsistency problems

Example Analysis - Indonesia

Bjorkegren (2009)

Example Applications

Attributions of impatience Impact of future income Poverty trap Response to uncertainty Investment features Role of credit Money Lender Testing this model

Overview




Understanding Poverty

Current theories/approaches to behavior in poverty Education Health Crime, etc.

Really about covariates of poverty Is there something intrinsic to poverty? Our approach: Scarcity

Conditions of scarcity (in money, time…) produce their own psychology.

This psychology, interacted with scarcity, produces specific behaviors.

The Packing Problem: A Suitcase metaphor

2 people packing

One a large suitcase; the other a small suitcase Larger suitcase - packs everything with room to spare,

or at least all important things, then chooses among remaining, less important items

Smaller suitcase - tries to pack the essentials, and might need to choose among remaining important items

The larger suitcase allows you to leave it partly unpacked. In case something else arises. The smaller suitcase does not..

(“The Packing Problem” in Complexity / Computational theory)

The Suitcase Metaphor

Slack makes it easier to packSlack reduces cognitive costs: easier to pack and travel with partly empty suitcase than a full one.

Bigger suitcase means slack is “cheaper”Slack is easier to maintain when suitcase is larger because what is being given up to buy slack is cheaper.

Problem complexity higher when suitcase is smallLarger suitcase means easier problem, requires less vigilance, both re decision quality or resistance to temptation; hence, provides greater margin for error. Smaller suitcase presents more complicated packing problem.

A consequence: errorConsequences of mishaps (misfortunes & mistakes) greater without slack. Especially important “mistake:” giving into temptation. The temptation looks like a graver error.

Lack of slack → The large suitcase person (typically greater slack) will appear more competent, a better packer.

Big suitcase can also be tightly packed

Poor in Trenton??!!

The poor in Chennai are packing summer clothes in a small suitcase; the poor in Trenton are packing winter clothes in a (somewhat - but not enough) larger suitcase:

Poor on wall street… (& rich in Chennai..)

Psychology of Scarcity

Greater attentiveness (& knowledge...) Forced to make tradeoffs Global bracketing Objective -- as opposed to relative -- valuation Horizon shortening Ego depletion ….

Taxi fare when you first get in?…

Imagine that a friend goes to buy an appliance priced at $100($500/$1000). Although the store’s prices are good, the clerk informs your friend that a store 45 minutes away offers the same item on sale for $50 less. Would you advise your friend to travel to the other store to save $50 on the $100($500/$1000) expense?

(Crystal Hall dissertation)

Percent traveling to save $50:

$100 $500 $1000

HI (Princeton commuters) 54 39 17

LI (soup kitchen) 76 73 87

Willingness to travel to save $25…

Suitcase (Thinking about tradeoffs)

Ted and James are on vacation. Ted is traveling with a small and very full suitcase. James’ suitcase is larger and has some space. They visit a store offering running shoes on sale.

James asks “Do I like these shoes?”

Ted wonders “Do I like these shoes? AND What, of at least equal size, do I take out of the suitcase if I buy them – and is it worth losing?!”...

% who think about what they might not buy instead… (USA)

% who think about what they might not buy instead… (India)

Scarcity in Time (tradeoffs)

George is a tourist visiting Rome for a weekend; Giorgio is in Rome for 6 months. Sunday afternoon, they both walk by a lively street fair.

Giorgio wonders, “Am I in the mood to listen to performers?”

George thinks, “Am I in the mood to listen to performers?

AND

What in my long to-do list will I forego in return…?

1) Scarcity implies broader frame

Even “positive expenditures” are tainted with tradeoffs

Spending money on a basic good for a poor person turns it into “luxury”

Spending time with family for a busy person turns, e.g., family time into “luxury”?…

2) Second piece of puzzle

Lack of slack means giving into temptations more consequential

Temptation (& its discontents)

Abe and Ben walk by a clothing store. They see an attractive leather jacket and in a moment of weakness both make an ill-advised purchase.

Abe goes home and thinks “What a bad purchase”

Ben goes home and thinks “What a bad purchase. Now I won’t have the money to repair my car. That means I may be late for work, which might lead me to…”

Who appears more myopic?…(Note: could rationalize the attribution, but such attribution may still produce a bias…)

Temptation (& its discontents)

Abe and Ben pass by a pastry shop and see a beautiful eclaire. Both have been trying to eat healthier.

Abe finds mental reserve and resists the temptation.

Ben, whose mind is occupied with the results of the upcoming bar exam succumbs and buys the pastry.

Charlie is stressed about whether he’ll be able to find enough money next month for his child’s day care. He also succumbs.

Ego Depletion

Executive control requires energy Like a muscle

Fatigued with use Fatigued through work / distractions (commonality of executive control across domains) Stressors/ego depletion may make it harder to exercise

self-control Vegetable vendors

Little temptations (cup of tea, dosa) are even harder to resist “Oasis of pleasure in the midst of misery”

How do we measure depletion?

Kosslyn’s miniCog

7 7 7 7

(Sugar cane Harvest in India)

Ego Depletion

Racists get depleted through encounters with Blacks

…Participants were led to a different room, where a second experimenter (E2) was waiting for them. They were told that there would be a delay before the second cognitive task, and they were asked to help with the creation of stimulus materials for a different experiment. For half of the participants, E2 was White, and for the other half, E2 was Black.

Decision quality

Anne and Beatrice are offered a financial contract.

Anne reads it over carefully and notices that there are fees which make the advertised interest rate look bad.

Beatrice’s mind is on her upcoming rent payment, school fees, medical expenses —”How will she make ends meet?!” She signs the contract.

Money (the poor) vs. Time (you)

Tradeoffs What will I not buy? What will I not do?

Temptation Shouldn’t have Shouldn’t have bought committed

Error/Distraction Forgot to pay Forgot to do, or pay… (esp. w.out reminders..)

Bad borrowing Given what you owe, what are you doing spending?!

Given what you owe,what are you doing schmoozing?!..

Irony of Poverty

Poor must make higher quality decisions Packing problems are harder Must resist temptations more Can’t afford mistakes

Poor are in worse position to make higher quality decisions Distracted by other stressors/decisions/conditions Depleted by challenges/temptations/past failures Unappreciated! (Both they and their packing problems...)

psychology of poverty sendhil mullainathan. overview design of redistribution programs specific...

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