Working Paper: NBER ID: w28784
Authors: Mika Akesaka; Peter Eibich; Chie Hanaoka; Hitoshi Shigeoka
Abstract: The poor live paycheck to paycheck and are repeatedly exposed to strong cyclical income fluctuations. We investigate whether such income fluctuations affect risk preference among the poor. If risk preference temporarily changes around payday, optimal decisions made before payday may no longer be optimal afterward, which could reinforce poverty. By exploiting Social Security payday cycles in the US, we find that risk preference among the poor relying heavily on Social Security changes around payday. Rather than cognitive decline before payday, the deterioration of mental health and relative deprivation may play a role. We find similar evidence among the Japanese elderly.
Keywords: risk preference; income fluctuations; payday cycles; poverty; social security
JEL Codes: D81; D91; I32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| income fluctuations around payday (J31) | risk preference (D81) |
| interviewed before payday (J33) | risk preference (D81) |
| interviewed after payday (J33) | risk preference (D81) |
| cognitive decline (D91) | risk preference (D81) |
| mental health deterioration (I12) | risk preference (D81) |
| relative deprivation (D63) | risk preference (D81) |