Human capital investment by the poor: Informing policy with laboratory experiments

Eckel, Catherine and Johnson, Cathleen and Montmarquette, Claude (2012): Human capital investment by the poor: Informing policy with laboratory experiments. Forthcoming in: Journal of Economic Behavior and Organization

Abstract

The purpose of the study is to better understand human capital investment decisions of the working poor, and to collect information that can be used to design a policy to induce the poor to invest in human capital. We use laboratory experimental methodology to elicit the preferences and observe the choices of the target population of a proposed government policy. We recruited 256 subjects in Montreal, Canada; 72 percent had income below 120 percent of the Canadian poverty level. The combination of survey measures and actual decisions allows us to better understand individual heterogeneity in responses to different subsidy levels. In particular, participants chose between various cash alternatives and educational subsidies, for themselves and for a family member, allowing for the construction of two measures of willingness to invest in education. Two behavioral characteristics, patience and attitude towards risk, are key to understanding the determinants of educational investment for the low-income individuals in this experiment. The decision to save for a family member’s education is somewhat different from that of investing in one’s own education. Patient participants were more likely to save for a family member’s education, but in contrast to investing in one’s own education, a subject’s attitude towards risk played no role.

• Item Type: MPRA Paper
• Language: English
• Keywords: Intertemporal choice, field experiments, risk attitudes, working poor.
• Subjects: C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C93 - Field Experiments; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty; D - Microeconomics > D9 - Intertemporal Choice > D91 - Intertemporal Household Choice ; Life Cycle Models and Saving

References

Albrecht, K., Volz, K. G., Sutter, M., Laibson, D. I., von Cramon, D. Y. 2010. What is for me is not for you: brain correlates of intertemporal choice for self and other. Social Cognitive and Affective Neuroscience, forthcoming.

Andersen, S., Harrison, G., Lau, M., Rutström, E., 2006. Elicitation using multiple price list formats. Experimental Economics 9, 383-405.

Ashraf, N. 2009. Spousal Control and Intra-household Decision Making: An Experimental Study in the Philippines. American Economic Review, 99, 1245–1277.

Banerjee, A. V., Duflo, E., 2008. The Experimental Approach to Development Economics. Massachusetts Institute of Technology, Working paper, Department of Economics and Abdul Latif Jameel Poverty Action Lab.

Bound, J., Turner, S., 2002. Going to war and going to college. Journal of Human Resources 20, 784-815.

Becker, G., Mulligan, C., 1997. The endogenous determination of time preference. Quarterly Journal of Economics 112 , 729-58.

Binswanger, H. P., 1980. Attitude towards risk: Experimental Measurement in rural India. American Journal of Agricultural Economics, 62, 395-407.

Burks, S., Carpenter, J., Goette, L., Rustichini, A., 2009. Cognitive skills explain economic preferences, strategic behavior, and job attachment. Proceedings of the National Academy of Sciences, 106, 7745-7750

Cameron, S., Heckman, J., 1998. Life cycle schooling and dynamic selection bias: Models and evidence for five cohorts of American males. Journal of Political Economy 106, 262-333.

Cardenas, J. C., Carpenter, J., 2008. Behavioural Development Economics: Lessons from Field Labs in the Developing World. Journal of Development Studies, 44, 311 – 338

Charness, G., and Gneezy, U. 2010. Portfolio Choice and Risk Attitudes: An Experiment. Economic Inquiry, 48: 133–146.

Chen, Stacey. H., 2002. Is investing in college education risky? Working paper, Department of Economics, State University of New York at Albany.

de Oliveira, A., Croson, R., and Eckel, C. 2011. “The Giving Type: Identifying Donors.” Journal of Public Economics 95:428-435.

Dynarski, S., 2002. The behavioral and distributional implications of aid to college. American Economic Review 92, 279-85.

Dohmen, T., Falk, A., Huffman, D., Sunde, U. 2010. Are Risk Aversion and Impatience Related to Cognitive Ability? American Economic Review, 100, 1238-60.

Eckel, C., Grossman, P., 2008. Forecasting risk attitudes: An experimental study using actual and forecast gamble choices. Journal of Economic Behavior and Organization 68, 1-17.

Eckel, C., Johnson, C., Montmarquette, C., 2002. Will the working poor invest in human capital? A laboratory experiment. Working paper 02-01, Social Research and Demonstration Corporation, (http://www.srdc.org/uploads/workingpoor.pdf)

Eckel, C., Johnson, C., Montmarquette, C., 2005. Saving decisions of the working poor: Short and long-term horizons. Research in Experimental Economics, Volume 10: Field Experiments in Economics, edited by J. Carpenter, G. Harrison, J. List.

Eckel, C., Johnson, C., Montmarquette, C., Rojas, C., 2007. Debt aversion and the demand for loans for post-secondary education. Public Finance Review 35, 233-262.

Frederick, S., Loewenstein, G., Donoghue, T.O., 2002. Time discounting and time preference: A critical review. Journal of Economic Literature XL, 351-401.

Harrison, G., W., Lau, M.I., Williams, M.B., 2002. Estimating individual discount rates in Denmark: A field experiment. American Economic Review 92, 1606-1617.

Harrison, G. W., Humphrey, S. J., Verschoor, A., 2009. Choice under Uncertainty: Evidence from Ethiopia, India and Uganda, Economic Journal, 120, 80-104.

Holt, C.A., Laury, S., 2002. Risk aversion and incentive effects. American Economic Review 92, 1644-1655.

Heckman, J.J., Lochner, L.J., Todd, P.E., 2008. Earnings functions and rates of retrurn. Journal of Human Capital 2, 1-31.

Karlan, D. S. 2005. Using Experimental Economics to Measure Social Capital and Predict Financial Decisions." American Economic Review, 95, 1688–1699.

Keane, M.P., 2002. Financial aid, borrowing constraints and college attendance: Evidence from structural estimates. American Economic Review, Papers and Proceedings 92, 293-97.

Keane, M.P., Wolpin, K.I., 2000. Eliminating race differences in school attainment and labor market success. Journal of Labor Economics 18, 614-52.

Kingwell, P., Dowie, M., Holler, B., Vincent, C., Gyarmati, D., Cao, H., 2005. Design and implementation of a program to help the poor save: The learn$ave project. Social Research and Demonstration Corporation (http://www.srdc.org/uploads/learnsave_implementation.pdf).

Laibson, D. I., Repetto, A., and Tobacman, J., 1998. Self-control and saving for retirement. Brookings Papers on Economic Activity 1, 91–196.

Levhari, D. Weiss, Y., 1974. The effect of risk on the investment in human capital. American Economic Review 64, 950-963.

Loewenstein, G., Thaler, R., 1989. Anomalies: Intertemporal choice. The Journal of Economic Perspectives 3, 181–93.

Meier, S., Sprenger, C. 2010. Present-Biased Preferences and Credit Card Borrowing. American Economic Journal: Applied Economics, Volume 2, Number 1, January 2010 , pp. 193-210(18)

O’Donoghue, T., Rabin, M., 2001. Choice and procrastination. Quarterly Journal of Economics 116, 121-160.

Roth, A., 2002. The economist as engineer: Game theory, experimentation, and computation as tools for design economics. Econometrica 70, 1341-78.

Samuelson, P., 1937. A note on the measurement of utility. Review of Economics Studies 4, 155-161.

Statistics Canada, Low-income division, 2001. Low income cutoffs from 1991-2000. Publication # 75F0002MIE – 01007.

Stefor, N., Turner, S., 2002. Back to school: Federal student aid policy and adult college enrollment. Journal of Human Resources 37, 336-52.

Tanaka, T., Camerer, C. F., Nguyen, Q. 2010. Risk and Time Preferences: Linking Experimental and Household Survey Data from Vietnam. American Economic Review 100, 557-571.

Weber, E., Shafir, S., Blais, A-R., 2004. Predicting risk-sensitivity in humans and lower animals: Risk as variance or coefficient of variation. Psychological Review 111, 430-455.

Weiss, Y., 1972. The risk element in occupational and educational choices. Journal of Political Economy 80, 1203-1213.