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Poverty and Self Control

Author

Listed:
  • Sevin Yeltekin

    (Carnegie Mellon University)

  • Debraj Ray

    (New York University)

  • B. Douglas Bernheim

    (Stanford University)

Abstract

The absence of self-control is often viewed as an important correlate of persistent poverty. Using a standard intertemporal allocation problem with credit constraints faced by an individual with quasi-hyperbolic preferences, we argue that poverty damages the ability to exercise self-control. Our theory invokes George Ainslie’s notion of “personal rules,†interpreted as subgame-perfect equilibria of an intrapersonal game played by a time-inconsistent decision maker. Our main result pertains to situations in which the individual is neither so patient that accumulation is possible from every asset level, nor so impatient that decumulation is unavoidable from every asset level. Such cases always possess a threshold level of assets above which personal rules support unbounded accumulation, and a second threshold level of assets below which there is a “poverty trap†: no personal rule permits the individual to avoid depleting all liquid wealth. In short, poverty perpetuates itself by undermining the ability to exercise self-control. Thus policies designed to help the poor accumulate assets may be highly effective, even if they are temporary. We also explore the implications for saving with easier access to credit, the demand for commitment devices, the design of accounts to promote saving, and the variation of the marginal propensity to consume across classes of resource claims.

Suggested Citation

  • Sevin Yeltekin & Debraj Ray & B. Douglas Bernheim, 2014. "Poverty and Self Control," 2014 Meeting Papers 1156, Society for Economic Dynamics.
  • Handle: RePEc:red:sed014:1156
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    References listed on IDEAS

    as
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    More about this item

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • I3 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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