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

Author

Listed:
  • Mike Akesaka

    (Osaka University)

  • Peter Eibich

    (Max Planck Institute for Demographic Research)

  • Chie Hanaoka

    (Toyo University)

  • Hitoshi Shigeoka

    (Simon Fraser University and NBER)

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

  • Mike Akesaka & Peter Eibich & Chie Hanaoka & Hitoshi Shigeoka, 2021. "Temporal Instability of Risk Preference among the Poor: Evidence from Payday Cycles," Discussion Papers dp21-05, Department of Economics, Simon Fraser University.
    • Handle: RePEc:sfu:sfudps:dp21-05
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    1. 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.
    2. Dietmar Fehr & Yannick Reichlin, 2021. "Status, Control Beliefs, and Risk-Taking," CESifo Working Paper Series 9253, CESifo.

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    More about this item

    Keywords

    poverty; risk preference; Social Security; mental health; relative deprivation; elderly; Health and Retirement Survey; Japanese Study of Aging and Retirement;
    All these keywords.

    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
    • I32 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Measurement and Analysis of Poverty

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