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Are income poverty and perceptions of financial difficulties dynamically interrelated?

Sara Ayllón () and Alessio Fusco ()

No 2016-05, LISER Working Paper Series from LISER

Abstract: An individual's economic ill fare can be assessed both objectively, looking at one's income with reference to a poverty line, or subjectively on the basis of the individual's perceived experience of financial difficulties. Although these are distinct perspectives, income poverty and perceptions of financial difficulties are likely to be interrelated: low income (especially if it persists) is likely to negatively affect perceptions of financial difficulties and, as recently suggested by the behavioral economics literature, (past) subjective sentiment may in return influence individual's income generating ability and poverty status. The aim of this paper is to determine the extent of these dynamic cross-effects between both processes. Using Luxembourg survey data, our main result highlights the existence of a feedback effect from past perceived financial difficulties on current income poverty suggesting that subjective perceptions can have objective effects on an individual's behaviour and outcomes.

Keywords: aspirations; behavioural economics; dynamic joint models; feedback effects; income poverty; perceived financial difficulties; state dependence (search for similar items in EconPapers)
JEL-codes: D31 D60 I32 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2016-06
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Journal Article: Are income poverty and perceptions of financial difficulties dynamically interrelated? (2017) Downloads
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