Hostname: page-component-8448b6f56d-gtxcr Total loading time: 0 Render date: 2024-04-19T06:02:15.169Z Has data issue: false hasContentIssue false
  • English
  • Français

Poverty, Irrationality, and the Value of Cash Transfers

Published online by Cambridge University Press:  03 February 2021

Daniel Acland
Daniel Acland*
Affiliation:
Goldman School of Public Policy, University of California, Berkeley, CA, USA, e-mail: acland@berkeley.edu
*
e-mail: acland@berkeley.edu
Get access Rights & Permissions [Opens in a new window]

Abstract

It has been demonstrated that irrationality reduces the efficiency of individuals’ allocations, as measured by their “true” or rational preferences. There is also evidence that poverty increases irrationality of different sorts. As a result, the net benefit to society of a cash transfer from taxpayers to welfare recipients may not be zero. The fact that the transfer will be allocated less efficiently by the recipients than by the taxpayers will reduce the value of the transfer, while if the transfer increases recipients’ rationality, it will increase the efficiency of the allocation of their pretransfer budgets, thus increasing the value of the transfer. The net effect on society will be positive or negative, depending in large part on the degree to which the transfer increases rationality. I model these effects in the context of present-biased preferences and explore the effect of irrationality, income, and the size of transfer on the value of transfers. I conclude that under a plausible range of conditions, transfers can generate a substantial positive net benefit. I also model the choices of a fully rational paternalist and find little support for paternalistic in-kind transfers.

Keywords

Behavioral EconomicsCash transfersIrrationalityPoverty
Type
Article
Information
Journal of Benefit-Cost Analysis , Volume 12 , Issue 2 , Summer 2021 , pp. 227 - 257
Copyright
© The Author(s), 2021. Published by Cambridge University Press on behalf of the Society for Benefit-Cost Analysis

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Bangasser, D. A. and Shors, T. J.. 2010. “Critical Brain Circuits at the Intersection Between Stress and Learning.” Neuroscience & Biobehavioral Reviews, 34(8): 1223–1233.CrossRefGoogle Scholar
Bernheim, B. D. and Rangel, A.. 2009. “Beyond Revealed Preference: Choice-Theoretic Foundations for Behavioral Welfare Economics.” The Quarterly Journal of Economics, 124(1): 51–104.CrossRefGoogle Scholar
Boardman, A. E., Greenberg, D. H. Vining, A. R. and Weimer, D. L.. 2018. Cost-benefit Analysis: Concepts and Practice. New York, Cambridge University Press.CrossRefGoogle Scholar
Cacioppo, J. T., Cacioppo, S. and Gollan, J. K.. 2014. “The Negativity Bias: Conceptualization, Quantification, and Individual Differences.” Behavioral and Brain Sciences, 37(3): 297–350.CrossRefGoogle ScholarPubMed
Camerer, C., Issacharoff, S., Loewenstein, G., O’donoghue, T. and Rabin, M.. 2003. “Regulation for Conservatives: Behavioral Economics and the Case for ‘Asymmetric Paternalism’.” University of Pennsylvania Law Review, 151(3): 1211–1254.CrossRefGoogle Scholar
Carvalho, L. 2010. “Poverty and Time Preference.” RAND Working Paper Series WR-759.CrossRefGoogle Scholar
Carvalho, L. S., Meier, S. and Wang, S. W.. 2016. “Poverty and Economic Decision-making: Evidence From Changes in Financial Resources at Payday.” American Economic Review, 106(2): 260–284.CrossRefGoogle ScholarPubMed
Choi, S., Kariv, S., Müller, W. and Silverman, D.. 2014. “Who Is (More) Rational?” American Economic Review, 104(6): 1518–1550.CrossRefGoogle Scholar
Cingl, L. and Cahlikova, J. 2013. “Risk Preferences Under Acute Stress” (No. 17/2013). IES Working Paper.Google Scholar
Clark, L., Li, R., Wright, C. M., Rome, F., Fairchild, G., Dunn, B. D. and Aitken, M. R.. 2012. “Risk‐avoidant Decision Making Increased by Threat of Electric Shock.” Psychophysiology, 49(10): 1436–1443.CrossRefGoogle ScholarPubMed
Cornelisse, S., Van Ast, V., Haushofer, J., Seinstra, M. and Joels, M.. 2013. “Time-dependent Effect of Hydrocortisone Administration on Intertemporal Choice.” Available at SSRN 2294189.CrossRefGoogle Scholar
Currie, J. and Gahvari, F.. 2008. “Transfers in Cash and In-kind: Theory Meets the Data.” Journal of Economic Literature, 46(2): 333–383.CrossRefGoogle Scholar
Dohmen, T., Enke, B., Falk, A., Huffman, D. and Sunde, U.. 2015. “Patience and the Wealth of Nations.” Unpublished Manuscript, University of Bonn.Google Scholar
Dohmen, T., Falk, A., Huffman, D., Sunde, U., Schupp, J. and Wagner, G. G.. 2011. “Individual Risk Attitudes: Measurement, Determinants, and Behavioral Consequences.” Journal of the European Economic Association, 9(3): 522–550.CrossRefGoogle Scholar
Epper, T. 2015. Income Expectations, Limited Liquidity, and Anomalies in Intertemporal Choice. University of St. Gallen, School of Economics and Political Science Discussion Paper No, 19.Google Scholar
Camerer, C. F., Dreber, A., Forsell, E., Ho, T. H., Huber, J., Johannesson, M. and Heikensten, E.. 2016. “Evaluating Replicability of Laboratory Experiments in Economics.” Science, 351(6280), 1433–1436.CrossRefGoogle ScholarPubMed
DellaVigna, S. 2009. “Psychology and Economics: Evidence From the Field.” Journal of Economic Literature, 47(2): 315–372.CrossRefGoogle Scholar
Gilbert, D. T., Driver-Linn, E. and Wilson, T. D.. 2002. The Trouble with Vronsky: Impact Bias in the Forecasting of Future Affective States.Google Scholar
Guiso, L. and Paiella, M.. 2008. “Risk Aversion, Wealth, and Background Risk.” Journal of the European Economic Association, 6(6): 1109–1150.CrossRefGoogle Scholar
Guiso, L., Sapienza, P. and Zingales, L.. 2018. “Time Varying Risk Aversion.” Journal of Financial Economics, 128(3): 403–421.CrossRefGoogle Scholar
Hammitt, J. K. and Robinson, L. A.. 2011. “The Income Elasticity of the Value Per Statistical Life: Transferring Estimates Between High and Low Income Populations.” Journal of Benefit-Cost Analysis, 2(1): 1–29.CrossRefGoogle Scholar
Hastings, J. and Shapiro, J. M.. 2018. “How Are SNAP Benefits Spent? Evidence From a Retail Panel.” American Economic Review, 108(12): 3493–3540.CrossRefGoogle Scholar
Haushofer, J. and Fehr, E.. 2014. “On the Psychology of Poverty.” Science, 344(6186): 862–867.CrossRefGoogle Scholar
Haushofer, J., Schunk, D. and Fehr, E.. 2019. “Negative Income Shocks Increase Discount Rates.” Unpublished Manuscript.Google Scholar
Head, J. G. 1966. “On Merit Goods.” Finanz Archiv/Public Finance Analysis, H.1, 1–29.Google Scholar
Hendren, N. and Sprung-Keyser, B.. 2020. “A Unified Welfare Analysis of Government Policies.” The Quarterly Journal of Economics, 135(3): 1209–1318.CrossRefGoogle Scholar
Ifcher, J. and Zarghamee, H.. 2011. “Happiness and Time Preference: The Effect of Positive Affect in a Random-assignment Experiment.” American Economic Review, 101(7): 3109–3129.CrossRefGoogle Scholar
Kahneman, D. 2011. Thinking, Fast and Slow. New York: Macmillan.Google Scholar
Kahneman, D. and Tversky, A.. 2013. “Prospect Theory: An Analysis of Decision Under Risk.” In Handbook of the Fundamentals of Financial Decision Making: Part I, 99–127.Google Scholar
Kandasamy, N., Hardy, B., Page, L., Schaffner, M., Graggaber, J., Powlson, A. S. and Coates, J.. 2014. “Cortisol Shifts Financial Risk Preferences.” Proceedings of the National Academy of Sciences, 111(9): 3608–3613.CrossRefGoogle ScholarPubMed
Laibson, D. 1997. “Golden Eggs and Hyperbolic Discounting.” The Quarterly Journal of Economics, 112(2): 443–478.CrossRefGoogle Scholar
Lawrance, E. C. 1991. “Poverty and the Rate of Time Preference: Evidence From Panel Data.” Journal of Political Economy, 99(1): 54–77.CrossRefGoogle Scholar
Le Grand, J. and New, B.. 2015. Government Paternalism: Nanny State or Helpful Friend? Princeton University Press.Google Scholar
Lerner, J. S., Li, Y. and Weber, E. U.. 2013. “The Financial Costs of Sadness.” Psychological Science, 24(1): 72–79.CrossRefGoogle ScholarPubMed
Mani, A., Mullainathan, S., Shafir, E. and Zhao, J.. 2013. “Poverty Impedes Cognitive Function.” Science, 341(6149): 976–980.CrossRefGoogle ScholarPubMed
Mullainathan, S. and Shafir, E.. 2013. Scarcity: Why Having Too Little Means So Much. Macmillan.Google Scholar
O’Donoghue, T. and Rabin, M.. 1999. “Doing It Now or Later.” American Economic Review, 89(1): 103–124.CrossRefGoogle Scholar
Pender, J. L. 1996. “Discount Rates and Credit Markets: Theory and Evidence From Rural India.” Journal of Development Economics, 50(2): 257–296.CrossRefGoogle Scholar
Porcelli, A. J. and Delgado, M. R.. 2009. “Acute Stress Modulates Risk Taking in Financial Decision Making.” Psychological Science, 20(3): 278–283.CrossRefGoogle ScholarPubMed
Shah, A. K., Mullainathan, S. and Shafir, E.. 2012. “Some Consequences of Having Too Little.” Science, 338(6107): 682–685.CrossRefGoogle ScholarPubMed
Schnabel, L., Kesse-Guyot, E., Allès, B., Touvier, M., Srour, B., Hercberg, S. and Julia, C.. 2019. “Association Between Ultraprocessed Food Consumption and Risk of Mortality Among Middle-aged Adults in France.” JAMA Internal Medicine, 179(4): 490–498.CrossRefGoogle ScholarPubMed
Steptoe, A. and Ayers, Susan. 2004. “Stress, Health and Illness.” In Sutton, S., Baum, A. and Johnston, M. (eds.), The Sage Handbook of Health Psychology:169–196. London: SAGE Publications.Google Scholar
Tanaka, T., Camerer, C. F. and Nguyen, Q.. 2010. “Risk and Time Preferences: Linking Experimental and Household Survey Data from Vietnam.” American Economic Review, 100(1): 557–571.CrossRefGoogle Scholar
Thaler, R. H. 1991. “Some Empirical Evidence on Dynamic Inconsistency.” Quasi Rational Economics, 1, 127–136.Google Scholar
Thaler, R. H. and Shefrin, H. M.. 1981. “An Economic Theory of Self-control.” Journal of Political Economy, 89(2): 392–406.CrossRefGoogle Scholar
Thaler, R. H. and Sunstein, C. R.. 2003. “Libertarian Paternalism.” American Economic Review, 93(2): 175–179.CrossRefGoogle Scholar
Tversky, A. and Kahneman, D.. 1973. “Availability: A Heuristic for Judging Frequency and Probability.” Cognitive Psychology, 5(2): 207–232.CrossRefGoogle Scholar
Weimer, D. L. 2017. Behavioral Economics for Cost-benefit Analysis: Benefit Validity When Sovereign Consumers Seem to Make Mistakes. Cambridge University Press.CrossRefGoogle Scholar
Yesuf, M. and Bluffstone, R.. 2008. Wealth and Time Preference in Rural Ethiopia (No. dp-08-16-efd).Google Scholar
Supplementary material: PDF

Acland supplementary material

Acland supplementary material

Download Acland supplementary material(PDF)
PDF 640 KB