Money Maker or Penny Pincher: On the Psychological Foundation of Inequality Traps

Abstract

We provide a new perspective to understand poverty traps by researching the effect of psychological poverty on economic decisions. Our innovative sample consists of two pools of subjects: impoverished students and normal students from the same university. Subjects were first randomly assigned either to a treatment group that induced them to think about finances or to a control group. Then all subjects performed three tasks of economic decisions. Our results show that priming in general significantly intensifies the poor’s choices, with fewer total payoffs, higher response times, and favoring “pinching pennies” over “making money,” all of which can perpetuate poverty traps.

Keywords: Poverty Trap, Inequality, Cognitive Functions, Scarcity, Behavioral Experiment

JEL Classification: D01, O12, D91