Income, Psychological Well-Being, and the Dynamics of Poverty

Abstract

Evidence across disciplines suggests a bi-directional relationship between psychological and economic well-being indicating a possible feedback loop that can reinforce poverty. However, estimating these causal links is difficult due to this simultaneity. I use a panel GMM approach and a large-scale dataset from South Africa to estimate a system of dynamic equations where income and psychological well-being are simultaneously determined. I find evidence of nonlinear effects in both directions highlighting the vulnerability of the poor with low levels of psychological well-being. Simulations suggest this relationship can double the overall impact of shocks and explain prolonged poverty spells.

Keywords: poverty, psychological well-being, depression, income dynamics, South Africa