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Are the poor so present-biased?

Rachel Cassidy ()
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Rachel Cassidy: Institute for Fiscal Studies

No W18/24, IFS Working Papers from Institute for Fiscal Studies

Abstract: Estimates of "present-bias" among the poor may be exaggerated if poor individuals are credit-constrained and expect to have greater liquidity in the future. I conduct an experiment in rural Pakistan which provides causal evidence of this effect. I use windfalls to generate fully exogenous variation in subjects' liquidity constraints. I show that fluctuating liquidity has a signifi cant and sizeable effect on measures of time-inconsistency, which does not operate via cognitive functioning. Importantly, I establish that the causation runs from tighter liquidity constraints to appearing "present-biased" rather than truly present-biased individuals making choices which lead to tighter liquidity constraints.

Date: 2018-10-17
New Economics Papers: this item is included in nep-cbe, nep-exp and nep-mfd
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