Does poverty reduce mental health? An instrumental variable analysis

That poverty and mental health are negatively associated in developing countries is well known among epidemiologists. Whether the relationship is causal or associational, however, remains an open question. This paper aims to estimate the causal effect of poverty on mental health by exploiting a natural experiment induced by weather variability across 440 districts in Indonesia (N = 577,548). Precipitation anomaly in two climatological seasons is used as an instrument for poverty status, which is measured using per capita household consumption expenditure. Results of an instrumental variable estimation suggest that poverty causes poor mental health: halving one's consumption expenditure raises the probability of suffering mental illness by 0.06 point; in terms of elasticity, a 1% decrease in consumption brings about 0.62% more symptoms of common mental disorders. This poverty effect is approximately five times stronger than that obtained prior to instrumenting and is robust to alternative distributional assumption, model specification, sample stratification and estimation technique. An individual's mental health is also negatively correlated with district income inequality, suggesting that income distribution may have a significant influence upon mental health over and above the effect of poverty. The findings imply that mental health can be improved not only by influencing individuals' health knowledge and behaviour but also by implementing a more equitable economic policy.