Doctoral Dissertation Research in Economics: Income, cognitive tax, and economic decision-making among the urban poor

Cornell University, Ithaca NY

Investigators

Abstract

Research indicates that financial stress faced by the poor reduces their abilities to make informed choices (cognitive constraints). This results in inefficient decision-making among the poor in countries around the world. For example, the poor frequently do not take advantage of poverty-reducing programs and services in both developing and developed countries. This study explores whether these cognitive constraints explain inefficient economic decisions and behaviors observed among the poor. This research project focuses on informal workers in urban areas whose incomes fluctuate substantially in the short-term, in ways that are both expected and unexpected. The experiment involves giving some entrepreneurs in the informal sector (treated group) unexpected increased income through large unexpected purchases and offer them tasks that involve business decision making. By comparing decision-making ability of the treated with those of not treated, the researchers will be able to draw policy implications from the experiment. This research will indicate the potential demand for such policy design solutions as nudging reminders, default enrolment, and timing application of procedures to coincide with periods of higher cognition. The results of this research will help develop policies to improve decision making of people with cognitive constraints, hence increase the take-up rate of poverty reducing programs among the poor. This will help establish the US as the global leader in poverty reduction research. To understand the relationship between income and economic decision-making, this research project will conduct a lab-in-the-field experiment in an urban informal markets. The experiment is designed to test the hypothesis that an increase in income leads to improved economic decision-making. This research exploits the timing of market days to study the effect of increases in income and send mystery shoppers to make purchases from the traders to generate realistic, but unexpected increases in income. Following these income shocks, the PIs then measure economic decision-making using an incentivized, menu choice game that assesses consistency of decision-making ability and assess real-life economic decision-making by providing traders with information about an opportunity to receive free mobile credit. Finally, the PIs will measure attention and working memory to assess the cognitive mechanism. The results of this research will help develop policies to improve decision making of people with cognitive constraints, hence increase the take-up rate of poverty reducing programs among the poor. This will help establish the US as the global leader in poverty reduction research. This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.