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

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  • 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 risk preference among the poor. 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 US, we find that risk preference among the poor relying heavily on Social Security changes around payday. Rather than cognitive decline before payday, the deterioration of mental health and relative deprivation may play a role. We find similar evidence among the Japanese elderly.

Suggested Citation

  • Mika Akesaka & Peter Eibich & Chie Hanaoka & Hitoshi Shigeoka, 2021. "Temporal Instability of Risk Preference among the Poor: Evidence from Payday Cycles," ISER Discussion Paper 1133, Institute of Social and Economic Research, Osaka University.
  • Handle: RePEc:dpr:wpaper:1133
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    2. 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.
    3. Dietmar Fehr & Yannick Reichlin, 2021. "Status, Control Beliefs, and Risk-Taking," CESifo Working Paper Series 9253, CESifo.
    4. Kang, Songman & Son, Hyelim & Song, B.K., 2023. "The effect of housing price inequality on mental health," Labour Economics, Elsevier, vol. 85(C).

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    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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