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Are income poverty and perceptions of financial difficulties dynamically interrelated?

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  • AYLLON Sara
  • FUSCO Alessio

Abstract

An individual's economic ill fare can be assessed both objectively, looking at one's income with reference to a poverty line, or subjectively on the basis of the individual's perceived experience of financial difficulties. Although these are distinct perspectives, income poverty and perceptions of financial difficulties are likely to be interrelated: low income (especially if it persists) is likely to negatively affect perceptions of financial difficulties and, as recently suggested by the behavioral economics literature, (past) subjective sentiment may in return influence individual's income generating ability and poverty status. The aim of this paper is to determine the extent of these dynamic cross-effects between both processes. Using Luxembourg survey data, our main result highlights the existence of a feedback effect from past perceived financial difficulties on current income poverty suggesting that subjective perceptions can have objective effects on an individual's behaviour and outcomes.

Suggested Citation

  • AYLLON Sara & FUSCO Alessio, 2016. "Are income poverty and perceptions of financial difficulties dynamically interrelated?," LISER Working Paper Series 2016-05, LISER.
  • Handle: RePEc:irs:cepswp:2016-05
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    Cited by:

    1. Alessio Fusco, 2016. "The Dynamics of Perceived Financial Difficulties," Journal of Happiness Studies, Springer, vol. 17(4), pages 1599-1614, August.

    More about this item

    Keywords

    aspirations; behavioural economics; dynamic joint models; feedback effects; income poverty; perceived financial difficulties; state dependence;

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D60 - Microeconomics - - Welfare Economics - - - General
    • I32 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Measurement and Analysis of Poverty

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