Social Drivers of Aspirations Formation and Failure in Rural Nepal

The importance of aspirations for economic decision making has recently gained attention in the field of development economics. It’s been suggested that aspirations are formed from observing the status of one’s peers, and a failure of aspirations may result in a tendency to behave in a myopic and seemingly suboptimal manner. In this paper we provide the first known empirical test of the aspirations failure theory articulated in Appadurai (2004) and Ray (2006) using a unique dataset from rural Nepal. We ask two questions: (1) Does the current status of others in my aspirations window predict my own aspirations? (2) Is the aspirations gap correlated with future-oriented behavior? Our analysis suggests that the readily observable assets of one’s peers are quite important for one’s own wealth aspirations. However, the income of one’s peers, which is more readily hidden, is not important for one’s aspirational income. We also find evidence in support of Ray’s hypothesis that the aspirations gap is what ultimately drives future-oriented behavior, rather than aspirations or current standard of living.