Econometrica: Sep 2015, Volume 83, Issue 5

Poverty and Self-Control

https://doi.org/10.3982/ECTA11374
p. 1877-1911

B. Douglas Bernheim, Debraj Ray, Şevin Yeltekin

We argue that poverty can perpetuate itself by undermining the capacity for self‐control. In line with a distinguished psychological literature, we consider modes of self‐control that involve the self‐imposed use of contingent punishments and rewards. We study settings in which consumers with quasi‐hyperbolic preferences confront an otherwise standard intertemporal allocation problem with credit constraints. Our main result demonstrates that low initial assets can limit self‐control, trapping people in poverty, while individuals with high initial assets can accumulate indefinitely. Thus, even temporary policies that accumulation among the poor may be effective. We examine implications concerning the effect of access to credit on saving, the demand for commitment devices, the design of financial accounts to promote accumulation, and the variation of the marginal propensity to consume across income from different sources. We also explore the nature of optimal self‐control, demonstrating that it has a simple and behaviorally plausible structure that is immune to self‐renegotiation.

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Supplemental Material

Supplement to "Poverty and Self-Control"

This appendix provides supplementary material to accompany the main text.  Section A discusses the psychological foundations for our approach.  Section B provides full arguments for all the results in the main text concerning history-dependent equilibria;  essentially, up to and including Proposition 4.  Section C proves our assertions for the simplified model of Section 5.4 in the paper, and provides associated computational results.  Section D provides detailed arguments for results involving Markov perfect equilibria.  Section E describes the algorithm for computing subgame-perfect equilibrium values, and the parameter choices for the examples in the main text.  Section F provides computed examples with and without poverty traps.  Section G shows that a poverty trap is present even when MPE is used as punishment.  Finally, Section H presents the details of the model with taste shocks and lockbox saving regimes.  Referenced equations that appear in this Appendix are labeled as (a.1), (a.2), etc.  Other equation references are to equations in the main text.

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