Poverty and Self-Control

76 Pages Posted: 26 Jan 2013

See all articles by B. Douglas Bernheim

B. Douglas Bernheim

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Debraj Ray

New York University (NYU) - Department of Economics; Autonomous University of Barcelona - Instituto de Analisis Economico (CSIC)

Sevin Yeltekin

Carnegie Mellon University - David A. Tepper School of Business

Date Written: January 2013

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 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 even temporary policies designed to help the poor accumulate assets may be highly effective. 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

Bernheim, B. Douglas and Ray, Debraj and Yeltekin, Sevin, Poverty and Self-Control (January 2013). NBER Working Paper No. w18742. Available at SSRN: https://ssrn.com/abstract=2207276

B. Douglas Bernheim (Contact Author)

Stanford University - Department of Economics ( email )

Landau Economics Building
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Stanford, CA 94305-6072
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650-725-8732 (Phone)
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National Bureau of Economic Research (NBER)

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Debraj Ray

New York University (NYU) - Department of Economics ( email )

269 Mercer Street, 7th Floor
New York, NY 10003
United States
212-998-8906 (Phone)
212-995-4186 (Fax)

Autonomous University of Barcelona - Instituto de Analisis Economico (CSIC)

Campus UAB
E-08193 Bellaterra
Spain

Sevin Yeltekin

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

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