Poverty and Self-Control

B. Douglas Bernheim, Debraj Ray, Şevin Yeltekin

    Research output: Contribution to journalArticlepeer-review

    Abstract

    We argue that poverty can perpetuate itself by undermining the capacity for self-control. In line with a distinguished psychological literature, we consider modes of self-control that involve the self-imposed use of contingent punishments and rewards. We study settings in which consumers with quasi-hyperbolic preferences confront an otherwise standard intertemporal allocation problem with credit constraints. Our main result demonstrates that low initial assets can limit self-control, trapping people in poverty, while individuals with high initial assets can accumulate indefinitely. Thus, even temporary policies that initiate accumulation among the poor may be effective. We examine implications concerning the effect of access to credit on saving, the demand for commitment devices, the design of financial accounts to promote accumulation, and the variation of the marginal propensity to consume across income from different sources. We also explore the nature of optimal self-control, demonstrating that it has a simple and behaviorally plausible structure that is immune to self-renegotiation.

    Original languageEnglish (US)
    Pages (from-to)1877-1911
    Number of pages35
    JournalEconometrica
    Volume83
    Issue number5
    DOIs
    StatePublished - Sep 2015

    Keywords

    • Poverty
    • Self-control
    • Time inconsistency

    ASJC Scopus subject areas

    • Economics and Econometrics

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