Closing the Eyes on a Gloomy Future: Psychological Causes and Economic Consequences
AbstractThis paper analyzes the impact of economic prospects on one’s time preference. Research in psychol- ogy has shown how individuals modify their preferences in order to reduce their cognitive dissonance, which is the uncomfortable tension felt when simultaneously holding conflicting thoughts. It occurs among the poor when simultaneously caring about their future welfare while having gloomy economic prospects. Hence closing their eyes on the future can reduce their psychological distress at the cost of worsening their future economic wellbeing. This paper offers a new theoretical approach that decom- poses time discounting and analyzes the endogenous determination of one’s time horizon. The model predicts that, below a certain wealth, the time horizon of an individual is decreasing in poverty, result- ing in a behavioral poverty trap. The prediction is tested using data from a randomized experiment in Mozambique, which confirms that the beneficiaries of an agro-input subsidy and a matched savings intervention increased their planning horizon as a result of their improved economic prospects.
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Bibliographic InfoPaper provided by Agricultural and Applied Economics Association in its series 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington with number 123933.
Date of creation: 2012
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Endogenous time preference; cognitive dissonance; time horizon; Community/Rural/Urban Development; Consumer/Household Economics; Institutional and Behavioral Economics; D91; O12; Q12;
Find related papers by JEL classification:
- D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
- O12 - Economic Development, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
- Q12 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-06-05 (All new papers)
- NEP-CBE-2012-06-05 (Cognitive & Behavioural Economics)
- NEP-EVO-2012-06-05 (Evolutionary Economics)
- NEP-NEU-2012-06-05 (Neuroeconomics)
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