Wednesday, September 16, 2009
Poverty and Temptation
Chris Blattman points to an interesting new paper by Abhijit Banerjee and Sendhil Mullainathan on discount rates and temptations:
Some people are impulsive and impatient; they prefer a dollar or a donut today far more than a dollar or a donut tomorrow, so much so that they’re willing to give up shocking amounts of dollars and donuts tomorrow for just one today. This is one reason, some say, that we see such high interest rates for short-term borrowing, from New York to Calcutta.
Some people are not only impulsive and impatient, but inconsistently so. they care a lot about a dollar today versus tomorrow, but could care less between getting a dollar either 10 or 11 days from now. Economists call this ‘hyperbolic discounting’.
Both behaviors–impatience and time inconsistency–could be a source of persistent poverty.
Or not. Abhijit Banerjee presented a new paper here yesterday, written with MIT colleague Sendhil Mullainathan. They look at a number of seemingly unusual behaviors by the very poor–from exorbitant rates of short-term borrowing to the low take-up of small, high-return investments. Impatience cannot explain the patterns, they say. The impatience approach also requires the poor think differently than the rest of the population.
Another view: we’re all impulsive and impatient in the same way, but over a narrow range of goods that are quickly and cheaply satisfied. If you’re poor, these temptations are a big fraction of your income. If you’re even somewhat wealthy, they are not. Temptations are declining in income.
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