Poor and rational: Decision-making under scarcity
This journal article, published by the Journal of Political Economy, examines how poverty and financial constraints influence decision making among farmers in Zambia, how scarcity affects trading behaviour, and whether scarcity leads to more rational economic decisions. See the abstract below for details.
We investigate the link between poverty and decision-making in a sample of farmers in Zambia, who were given the opportunity to exchange randomly assigned household items for alternative items of similar value. Analyzing a total of 5,842 trading decisions and leveraging multiple sources of variation in financial constraints, we show that exchange asymmetries decrease in magnitude when participants are more constrained. This result is robust to experimental procedures and is not mediated by changes in cognitive performance. Consistent with the interpretation that scarcity leads to more rational decisions by increasing the utility loss from forgone trading, we show that trading probabilities go up when the market value of the items is exogenously increased.