How are poverty and self-control problems related? A recent article by Douglas Bernheim, Debraj Ray and Sevin Yeltekin tries to tackle this question by shedding light on the interaction between low levels of resources and people’s ability, or inability, to exert self-control.
Self-control – in what sense?
Before exploring the main argument of the paper, let’s clarify what exactly the authors mean by self-control, or the lack thereof. In a nutshell, someone is thought to have self-control problems when he or she is unable to stick to a plan he or she has previously made. Formally, this is modelled by introducing time-inconsistent discounting of the future: individuals show higher impatience with respect to consumption today and tomorrow than between consumption in 365 days and 366 days from now. Even though in both cases the decision is between two consecutive days, when the trade-off over which we have to decide lies in the far future, we are more willing to sacrifice instant satisfaction for more consumption on the next day.
The time-inconsistency arises when day number 365 arises: We no longer stick to the plan made 1 year ago, but fall victim to our desire for instant satisfaction. Own experience probably provides the best examples. For instance, in the middle of each month, I tell myself that when I receive my salary at the end of the month I will put half of it into my savings account. But when the end of the month arrives and the money hits my account, I typically end up spending the money that I had promised myself to save on the high street. This is the problem of time-inconsistency and lack of self-control.
So how does a lack of self-control perpetuate poverty?
Suppose the decisions we are making every period are between consumption and saving (=consumption in the future). Knowing that we have self-control problems, we might want to define personal rules and punishments if we do not follow the rules. Bernheim, Raj and Yeltekin use the example of the dessert: The personal rule is “never eat dessert”, the violation of which has the wider consequence of “if I eat dessert today, I will eat dessert every day”, with the punishment of gaining a lot of weight. Knowing that if I violate my rule today I will end up in a dessert-eating spree that leads me to gain lots of weight, I am deterred from violating my rule in the first place. Key in their model is what they call the “worst possible punishment”, the consequence of violating my personal rule. Discipline is easier to achieve if the punishment for violating the personal rule is very harsh. Punishment is thus crucial for the ability to exercise self-control when people behave time-inconsistently. The authors embed this into their model by introducing a borrowing constraint: People are not able to consume all their life-time income instantly, but rather, face a threshold of assets below which they cannot borrow against future income. The borrowing constraint is key for the emergence of a poverty trap: When people have low levels of assets, that is, their wealth is close to the threshold, a deviation from a consumption and savings plan has only very small consequences: The lowest they can fall is not far from where they currently are, they don’t have much to lose. An individual that has a high level of assets has more to lose, and thus faces a higher “worst possible punishment” for deviating from a plan. The imminence of the punishment thus enables her to exercise discipline in the first place, and allows her to accumulate assets, and to enjoy higher levels of consumption in the future.
How does this matter for anti-poverty policy?
The reason why we have chosen to talk about this paper is that it proposes a new explanation for the poverty trap that does not rely on the assumption that poor people have different preferences than non-poor people and are therefore trapped in a ‘culture of poverty’. Instead, the paper uses a trait that arguably most human’s possess, a lack of self-control, and show how the circumstance of having low levels of resources may exacerbate it.
If we believe in this model, some of the eligibility criteria (such requiring people to use up most of their savings before being eligible to claim) for social security and other benefits may actually be counter-productive in a behavioural sense, because they impair people’s ability to exercise self-control by reducing their “worst possible punishment”. A good anti-poverty policy could involve enabling poor people to build up sufficient savings, which would allow them to escape the self-control trap, so they no longer have “nothing left to lose”.