Development economists have long been interested in poverty traps: feedback loops that make it difficult for individuals to escape poverty. New work at the intersection of psychology and economics suggests a focus on psychological micro-foundations. In particular, worries about financial problems may capture individuals? attentional and therefore decreases their available cognitive resources; this in turn can create behaviors that further worsen poverty. While previous work has explored these ideas, there is scant evidence of these channels impacting real economic outcomes. This project seeks to provide the first piece of evidence on the impact of poverty on economic field behavior: worker productivity. Results from this study would provide the first evidence on how poverty, operating through cognitive function, could directly reinforce itself. This would be a first step toward a more thorough integration of psychology within development economics, with important implications for public policy and the wellbeing of the poor. For instance, if the hypothesized effects are indeed at play, then impediments to productivity would occur precisely at times when individuals face the greatest financial trouble and therefore face the greatest need for cash. This implies that reducing volatility or mitigating financial vulnerability could have direct productivity benefits. In addition, transfer or public workfare programs could have productivity benefits that are unmeasured to-date. Finally, the hypothesized feedback effects of poverty would be evidence of an underlying determinant of persistent inequality and reduced social mobility.

This study uses a three-week field experiment to examine whether income directly affects labor productivity by changing cognitive function. The experiment directly and cleanly tests whether poverty affects productivity by experimentally inducing variation in financial constraints?via large lump-sum wage payments. To provide evidence on whether the underlying mechanism that drives this relationship is cognitive load, the design makes use of two complementary approaches: (i) It tests whether the estimated impacts of poverty on productivity are larger for a manufacturing task that relies more heavily on cognitive resources. (ii) It uses a salience intervention that directs worker attention to financial constraints, and tests whether the negative effects of this intervention on productivity are dampened when financial constraints are (experimentally) eased. Productivity, labor earnings, consumption patterns, and cognitive function will all be measured.

Agency
National Science Foundation (NSF)
Institute
Division of Social and Economic Sciences (SES)
Application #
1658931
Program Officer
Kwabena Gyimah-Brempong
Project Start
Project End
Budget Start
2017-03-01
Budget End
2019-02-28
Support Year
Fiscal Year
2016
Total Cost
$362,540
Indirect Cost
Name
National Bureau of Economic Research Inc
Department
Type
DUNS #
City
Cambridge
State
MA
Country
United States
Zip Code
02138