Poverty and Economic Decision-Making: Evidence from Changes in Financial Resources at Payday
Open accessAbstract
We study the effect of financial resources on decision-making. Low-income US households are randomly assigned to receive an online survey before or after payday. The survey collects measures of cognitive function and administers risk and intertemporal choice tasks. The study design generates variation in cash, checking and savings balances, and expenditures. Before-payday participants behave as if they are more present-biased when making intertemporal choices about monetary rewards but not when making intertemporal choices about nonmonetary real-effort tasks. Nor do we find before-after differences in risk-taking, the quality of decision-making, the performance in cognitive function tasks, or in heuristic judgments. (JEL C83, D14, D81, D91, I32)
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Baseline data of the payday studies show that households face tougher financial circumstances before payday compared to after payday, including lower expenditures, cash holdings, and checking and savings account balances.
“Baseline data of both studies show that households face tougher financial circumstances before payday compared to after payday (e.g., lower expenditures, cash holdings, and checking and savings account balances).”
From Poverty and economic decision making: a review of scarcity theory (2022) · cites this paper as Carvalho et al. (2016)
Section II.A reports lower median expenditures, cash holdings, and checking and savings balances before payday in both studies. But Section II.A identifies these comparisons as measured at the follow-up surveys; Section I.A describes the baseline surveys as collecting payment information. The claim mislabels the financial comparisons as baseline data. (LLM, conf=0.88)
Experimental — accuracy not yet measuredStress and negative affect and rational responses to liquidity constraints act as main underlying mechanisms for the effects of poverty on time discounting and risk aversion.
“Several studies have shown that poverty increases both time discounting and risk aversion (see for an overview: Haushofer and Fehr 2014), while stress and negative affect (Haushofer and Fehr 2014) and rational responses to liquidity constraints (Carvalho et al. 2016) act as main underlying mechanisms.”
From Poverty and economic decision making: a review of scarcity theory (2022) · cites this paper as Carvalho et al. 2016
The Conclusion says liquidity constraints most likely explain the before-payday group's greater apparent present bias in monetary choices. But it also reports no before–after difference in willingness to take risks, so this paper does not support liquidity constraints as a mechanism for increased risk aversion. The stress and negative-affect claim is attributed to a different citation. (LLM, conf=0.88)
Experimental — accuracy not yet measuredOther studies exploiting variation in payday and windfalls found that poverty increased time discounting, but not due to cognitive load.
“Other studies exploiting variation in payday (Carvalho et al. 2016) and windfalls (Cassidy 2018) found that poverty increased time discounting, but not due to cognitive load.”
From Poverty and economic decision making: a review of scarcity theory (2022) · cites this paper as Carvalho et al. 2016
The Abstract and Results (sections B.1 and C.1; page numbers unavailable) report that participants before payday behaved as if they were more present-biased in monetary choices, while cognitive-task performance did not significantly differ. But the paper does not establish that poverty increased time discounting generally: it found no corresponding difference in real-effort choices and suggests liquidity constraints explain the monetary result. Its findings concern a short-lived change in resources before payday, not poverty broadly. (LLM, conf=0.87)
Experimental — accuracy not yet measuredStudies consistently show that facing financial scarcity increases temporal discounting.
“Studies consistently show that facing financial scarcity increases temporal discounting (Bartos et al. 2018; Carvalho et al. 2016; Cassidy 2018; Ong et al. 2019).”
From Poverty and economic decision making: a review of scarcity theory (2022) · cites this paper as Carvalho et al. 2016
The Conclusion reports that before-payday participants behaved as if they were more present-biased when choosing monetary rewards. But Section II.B finds no before–after difference for a real-effort choice, and the authors attribute the monetary result most likely to liquidity constraints rather than a change in time preferences. This paper therefore does not support the unqualified claim that scarcity consistently increases temporal discounting. (LLM, conf=0.88)
Experimental — accuracy not yet measuredCarvalho et al. (2016) concluded that short-term variations in financial circumstances did not diminish cognitive function.
“They conclude that short-term variations in financial circumstances did not diminish cognitive function.”
From Poverty and economic decision making: a review of scarcity theory (2022) · cites this paper as Carvalho et al. (2016)
The effect of poverty on cognitive control was not found in studies exploiting monthly payday or loan disbursement, possibly because these financial shocks are too small to affect cognitive control meaningfully.
“Specifically, the effect was not found in studies exploiting (monthly) payday (Carvalho et al. 2016; Lichand and Mani 2020) or loan disbursement (Fehr et al. 2019), possibly because these financial shocks are too small to affect cognitive control meaningfully.”
From Poverty and economic decision making: a review of scarcity theory (2022) · cites this paper as Carvalho et al. 2016
Carvalho et al. (2016) found that results did not support the hypothesis that greater scarcity before payday impedes executive function, both for the full sample and for more financially constrained subgroups.
“However, results did not support the hypothesis of greater scarcity before payday impeding executive function. 26 This holds both for the full sample as for more financially constrained subgroups.”
From Poverty and economic decision making: a review of scarcity theory (2022) · cites this paper as Carvalho et al. (2016)
Carvalho et al. (2016) did not find an effect of financial scarcity on risk behavior.
“In their payday study, Carvalho et al. (2016) did not find an effect of financial scarcity on risk behavior.”
From Poverty and economic decision making: a review of scarcity theory (2022) · cites this paper as Carvalho et al. (2016)
It is unclear how financial scarcity affects risk aversion as studies have shown positive, negative, or no effects.
“First, it is unclear how financial scarcity affects risk aversion as studies have shown positive (Ong et al. 2019), negative (Dalton et al. 2019), or no effects (Carvalho et al. 2016).”
From Poverty and economic decision making: a review of scarcity theory (2022) · cites this paper as Carvalho et al. 2016
Increased time discounting might reflect rational adaptations of the poor to changes in liquidity constraints rather than increased cognitive load.
“Both studies propose that increased time discounting might reflect rational adaptations of the poor to changes in liquidity constraints rather than increased cognitive load.”
From Poverty and economic decision making: a review of scarcity theory (2022) · cites this paper as Carvalho et al. 2016
Participants surveyed before and after payday performed similar on cognitive function tasks.
“Participants surveyed before and after payday performed similar on cognitive function tasks”
From Poverty and economic decision making: a review of scarcity theory (2022) · cites this paper as Carvalho et al. (2016)
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Poverty and economic decision making: a review of scarcity theory
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The emergence of economic rationality of GPT
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“Moreover, it has been proposed as a measure of decision-making quality and linked to a wide range of economic outcomes, such as occupation, income, and wealth differences across individuals, and development gaps across countries (Banks et al., 2019; Cappelen et al., 2021; Carvalho et al., 2016; Choi et al., 2014; Fism…”
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Poverty, Seasonal Scarcity and Exchange Asymmetries
Fehr, D., Fink, G., & Jack, K. (2019) · doi:10.3386/w26357 · Cited by 40 · see citing works
Procrastination in the Field: Evidence from Tax Filing
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Self-citation
- Authors
- Carvalho, L. S., Meier, S., & Wang, S. W.
- Affiliations
- University of Southern California (US)
- Columbia University (US)
- University of Pittsburgh (US)
- Venue
- American Economic Review
- Publisher
- American Economic Association
- Published
- 2016-02-01
- Volume
- 106
- Issue
- 2
- Pages
- 260-284
- ISSN
- 0002-8282 (ISSN-L)
- PMC
- PMC5167530
- OpenAlex
- W2263179472
- Cited by
- 506
- References
- 5
- Citations by year
- 2026: 34 · 2025: 60 · 2024: 64 · 2023: 46 · 2022: 53 · 2021: 63 · 2020: 54 · 2019: 52 · 2018: 25 · 2017: 25 · 2016: 17 · 2015: 6 · 2014: 4 · 2013: 2 · 2012: 1
- FWCI
- 34.29
- Type
- journal article
- Language
- en
- Open access
- bronze
- doi.org
- Locations
- American Economic Review (publishedVersion)
- PubMed (publishedVersion)
- PubMed Central (acceptedVersion)
- RePEc: Research Papers in Economics (submittedVersion)
- Funders
- National Institute on Aging (P30AG024962, R21AG044731, P30AG043073)
- Topics
- Social Sciences › Decision Sciences › General Decision Sciences › Decision-Making and Behavioral Economics
- Social Sciences › Business, Management and Accounting › Accounting › Financial Literacy, Pension, Retirement Analysis
- Social Sciences › Sociology and Political Science › Income, Poverty, and Inequality
- Keywords
- poverty, financial resources, intertemporal choice, present bias, risk-taking, cognitive function, decision-making, low-income households, checking accounts, heuristics
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