Temporal Instability of Risk Preference among the Poor: Evidence from Payday Cycles
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.
The authors thank Keith Marzilli Ericson, David Freeman, Alex Imas, Stephan Meier, Takeshi Murooka, Krishna Pendakur, and seminar participants at Osaka University (ISER and OSIPP), Simon Fraser University, NBER Aging Spring meeting, and the Joint Workshop on Behavioral Economics for their comments and suggestions. The Health and Retirement Study (HRS) is sponsored by the National Institute on Aging and is conducted by the University of Michigan. The Japanese Study of Aging and Retirement (JSTAR) is conducted by the Research Institute of Economy, Trade, and Industry (RIETI), Hitotsubashi University, and University of Tokyo. The Japanese General Social Surveys (JGSS) are conducted by Osaka University of Commerce, in collaboration with the Institute of Social Science at the University of Tokyo. Akesaka acknowledges financial support from JSPS KAKENHI (15H05728, 20H05631, 20K13511, 21H04397) and the Joint Usage/Research Center for Behavioral Economics at ISER. Hanaoka acknowledges financial support from JSPS KAKENHI (17K03783, 19H05487, 20K20418). Any errors are our own. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Mika Akesaka & Peter Eibich & Chie Hanaoka & Hitoshi Shigeoka, 2023. "Temporal Instability of Risk Preference among the Poor: Evidence from Payday Cycles," American Economic Journal: Applied Economics, vol 15(4), pages 68-99. citation courtesy of