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Temporal Instability of Risk Preference among the Poor: Evidence from Payday Cycles

Author

Listed:
  • Mika Akesaka
  • Peter Eibich
  • Chie Hanaoka
  • Hitoshi Shigeoka

Abstract

The poor live paycheck to paycheck and are repeatedly exposed to strong cyclical income fluctuations. We investigate whether such income fluctuations affect their risk preference. If risk preference temporarily changes around payday, optimal decisions made before payday may no longer be optimal afterward, which could reinforce poverty. By exploiting social security payday cycles in the United States, we find that the poor relying heavily on social security become more risk tolerant before payday. More than cognitive decline before payday, the deterioration of mental health and relative deprivation are likely to play a role. We find similar evidence among the Japanese elderly.

Suggested Citation

  • Mika Akesaka & Peter Eibich & Chie Hanaoka & Hitoshi Shigeoka, 2023. "Temporal Instability of Risk Preference among the Poor: Evidence from Payday Cycles," American Economic Journal: Applied Economics, American Economic Association, vol. 15(4), pages 68-99, October.
    • Handle: RePEc:aea:aejapp:v:15:y:2023:i:4:p:68-99
    DOI: 10.1257/app.20220073
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    Cited by:

    1. Harry Pickard & Thomas Dohmen & Bert Landeghem, 2024. "Inequality and risk preference," Journal of Risk and Uncertainty, Springer, vol. 69(2), pages 191-217, October.
    2. Ibuka, Yoko & Hamaaki, Junya, 2025. "Income receipt, economic activities, and health: Evidence from ambulance transport patterns," Journal of Health Economics, Elsevier, vol. 100(C).
    3. repec:ces:ceswps:_9253 is not listed on IDEAS
    4. repec:osf:socarx:gqjkm_v1 is not listed on IDEAS
    5. Timothy K. M. Beatty & Joakim A. Weill, 2024. "Social Security and High-Frequency Labor Supply: Evidence from Uber Drivers," Finance and Economics Discussion Series 2024-079, Board of Governors of the Federal Reserve System (U.S.).
    6. de Courson, Benoît & Frankenhuis, Willem & Nettle, Daniel, 2024. "Poverty is associated with both risk avoidance and risk taking: an empirical test of the desperation threshold model," SocArXiv gqjkm, Center for Open Science.
    7. Cheng, Lingguo & Lu, Yunfeng, 2024. "Does retirement make people more risk averse?," Journal of Economic Behavior & Organization, Elsevier, vol. 224(C), pages 135-155.
    8. Kang, Songman & Son, Hyelim & Song, B.K., 2023. "The effect of housing price inequality on mental health," Labour Economics, Elsevier, vol. 85(C).

    More about this item

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • I12 - Health, Education, and Welfare - - Health - - - Health Behavior
    • I32 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Measurement and Analysis of Poverty
    • J14 - Labor and Demographic Economics - - Demographic Economics - - - Economics of the Elderly; Economics of the Handicapped; Non-Labor Market Discrimination
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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