Taxing the poor twice? Poverty, Bandwidth, and Value of Consumption

The study focuses on understanding the impact of cognitive bandwidth constraints—imposed by poverty—on the utility gained from positive and negative experiences.


Principal Investigators:
  • Prof. Heather Schofield
  • Prof. Atheendar Venkataramani

Location: Chennai

Time-line: 2018 - 2020

Status: Completed

About:

Being born into poverty shapes future outcomes. A long-standing literature has documented the negative effects of poverty on health and education. These relationships may be even more insidious due to the possibility of poverty traps – where the consequence of poverty themselves make it more difficult to exit poverty (Dasgupta and Ray 1986). Recent work has also begun to examine the psychological consequences of poverty, demonstrating poverty’s negative impacts on cognition (“bandwidth”) and, consequently, decision-making and productivity (Shah et al. 2012; Mani et al. 2013; Schilbach et al. 2016).

However, the psychological consequences of poverty’s negative impacts may not be limited to productivity and decision-making. Economists have traditionally viewed the “cost” of being poor to be limited consumption – that is, the poor have lower utility and welfare due simply to the fact that they consume fewer goods and services given their limited resources. However, poverty - by reducing cognitive bandwidth - may also reduce the enjoyment and satisfaction obtained from any given level of consumption. For example, sleep-deprived or financially stressed individuals may receive less utility from entertainment or participating in social functions. This implies that poverty could levy a “double tax,” where the poor not only consume less but also have lower utility from a given unit of consumption when bandwidth is constrained.

If true, this hypothesis would dramatically alter economists’ views of the utility and the welfare costs of poverty and alter the cost-benefit calculations of policies to address poverty. However, evidence examining the link between poverty, bandwidth constraints, and the marginal utility of consumption is limited.

Research Design:

To examine this hypothesis, we will use a variety of validated methods to experimentally alter cognitive bandwidth and the value of consumption. These methods to alter bandwidth include standard laboratory approaches that range from having participants memorize a visual sequence (an adaptation of Corsi: a cognitive task that requires an individual to remember a sequence of squares that flash/ turn into a different colour on the screen) to giving a small snack at certain intervals to induce thirst. All participants (both treatment and control) will then undertake simple laboratory-based tasks to measure bandwidth. Finally, participants will undertake positive consumption activities and rate their enjoyment and willingness to pay (accept) for these experiences.

Grant Partners: