Paper: Closing the Eyes on a Gloomy Future: Psychological Causes and Economic Consequences

This paper provides a theoretical framework and the first empirical evidence of the endogeneous determination of time discounting. It proposes a decomposition of time discounting into time preference and a horizon function, which describes the extent to which an individual relates to her future selves. For the poor, the contradiction between gloomy prospects and a care for their future welfare is a source of cognitive dissonance. Hence closing their eyes on the future can reduce their psychological distress at the cost of worsening their future economic wellbeing. The model predicts that, below a certain wealth, the time horizon of an individual is decreasing in poverty, resulting in a behavioral poverty trap. The prediction is tested using the data from 1,546 rural households, which confirms that the randomly selected beneficiaries of an agro-input subsidy and a matched savings intervention increased their planning horizon as a result of their improved economic prospects.