Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2024-09-13
Number: 24-058/I
Author-Name: Víctor González-Jiménez
Author-Workplace-Name: Erasmus University Rotterdam
Title: Poverty and Uncertainty Attitudes
Abstract: This paper demonstrates that well-established biases in decision making under uncertainty can generate poverty traps. A theoretical framework is developed to demonstrate that: i) probability weighting and ambiguity attitude can lead individuals to erroneously undervalue profitable investments, and ii) poverty increases the magnitude of these investment errors. The model predicts that poverty is perpetuated by inducing poor individuals to underinvest in profitable opportunities to a greater extent than rich individuals. We empirically validate these theoretical predictions using data from two experiments conducted on a representative sample of American households.
Classification-JEL: O12, D81, D09, I3
Keywords: Poverty traps, Probability Weighting, Ambiguity Attitude
File-URL: https://papers.tinbergen.nl/24058.pdf
File-Format: application/pdf
File-Size: 819.897 bytes
Handle: RePEc:tin:wpaper:20240058