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Focusing effect and the poverty trap

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  • Canidio, Andrea

Abstract

I build a dynamic consumption-savings model in which agents׳ choices are distorted by the focusing effect: agents overweight the utility of goods in which their options differ more. I show that the consumption-savings choice depends both on the marginal return on savings and on the total return on savings, implying that the incentive to save may increase with the initial level of wealth. As a consequence, a salience-based poverty trap may exist when the marginal return on savings is sufficiently high and sufficiently flat. I also consider the case of a perfect credit market and show that a poverty trap may emerge when the salience of consumption is bounded above. I discuss policy implications. In particular, imposing upon an agent a punishment for decreasing savings below a threshold leads to a higher level of savings, even when the threshold triggering the punishment is not binding

Suggested Citation

  • Canidio, Andrea, 2015. "Focusing effect and the poverty trap," European Economic Review, Elsevier, vol. 76(C), pages 222-238.
    • Handle: RePEc:eee:eecrev:v:76:y:2015:i:c:p:222-238
    DOI: 10.1016/j.euroecorev.2015.03.008
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    References listed on IDEAS

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    More about this item

    Keywords

    Behavioral poverty trap; Salience; Focusing effect; Poverty; Inequality;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration

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