Temporal instability of risk preference among the poor: evidence from payday cycles

Akesaka, M., Eibich, P., Hanaoka, C., Shigeoka, H.
American Economic Journal: Applied Economics (2023), forthcoming


The poor live paycheck to paycheck and are repeatedly exposed to strong cyclical income fluctuations. We investigate whether such income fluctuations affect their risk preference. 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 the poor relying heavily on Social Security become more risk tolerant before payday. More than cognitive decline before payday, the deterioration of mental health and relative deprivation are likely to play a role. We find similar evidence among the Japanese elderly.

Das Max-Planck-Institut für demografische Forschung (MPIDR) in Rostock ist eines der international führenden Zentren für Bevölkerungswissenschaft. Es gehört zur Max-Planck-Gesellschaft, einer der weltweit renommiertesten Forschungsgemeinschaften.