Poverty and Economic Decision-Making: Evidence from Changes in Financial Resources at Payday

Abstract

We study the effect of financial resources on decision-making. Low-income U.S. households are randomly assigned to receive an online survey before or after payday. The survey collects measures of cognitive function and administers risk and intertemporal choice tasks. The study design generates variation in cash, checking and savings balances, and expenditures. Before-payday participants behave as if they are more present-biased when making intertemporal choices about monetary rewards but not when making intertemporal choices about non-monetary real-effort tasks. Nor do we find before-after differences in risk-taking, the quality of decision-making, the performance in cognitive function tasks, or in heuristic judgments.

How Soon Is Now? Evidence of Present Bias from Convex Time Budget Experiments

“…8 Our findings in this regard resonate with those of Meier and Sprenger (2010), but stand in contrast to those of Dean and Sautmann (2016) and Carvalho, Meier, and Wang (2016).…”

“…We follow several recent studies (cf. Andersen, Harrison, Lau, and Rutström 2008, Andreoni and Sprenger 2012a, Giné, Goldberg, Silverman, and Yang 2017, Carvalho, Meier, and Wang 2016 in equalizing the financial and cognitive transaction costs associated with immediate and delayed payments. For example, we adopt Andreoni and Sprenger's (2012a) approach of dividing the show-up fee into two equal, dated payments; and we use a payment technology (M-Pesa) with which subjects are extremely familiar.…”

“…Andersen, Harrison, Lau, and Rutström (2008), Giné, Goldberg, Silverman, and Yang (2017) and Carvalho, Meier, and Wang (2016) introduce longer delays (of at least 1 day) before the earliest possible payments can be accessed.…”

“…Dean and Sautmann (2016) find that intertemporal tradeoffs in their lab-in-the-field experiment are associated with both expenditure shocks and savings, suggesting that narrow bracketing fails in their data. These results have sparked a lively debate, with some scholars arguing that choices in time preference experiments are driven primarily by liquidity constraints and interest rates outside the lab (Dean and Sautmann 2016, Epper 2015, Carvalho, Meier, and Wang 2016, while others maintain that there is little evidence that agents integrate moderately-sized monetary payments into their optimal lifetime consumption plan through smoothing and arbitrage (Halevy 2014, Halevy 2015.…”

“…For example, in Giné, Goldberg, Silverman, and Yang (2017), the soonest payments occur 1 day after decisions are made. In Carvalho, Meier, and Wang (2016), checks are mailed on the day decisions are made, so they arrive at least 1 day later. Interestingly, Carvalho, Meier, and Wang (2016) still observe present bias over money among subjects who make CTB decisions prior to their payday, but not among those who make decisions after payday.…”