Temporal Instability of Risk Preference among the Poor: Evidence from Payday Cycles
52 Pages Posted: 7 May 2021
Date Written: May 3, 2021
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.
Keywords: poverty, risk preference, Social Security, mental health, relative deprivation, elderly, Health and Retirement Survey, Japanese Study of Aging and Retirement
JEL Classification: D81, D91, I32
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