Learning Incentive Schemes for the Working Poor
Learning Incentive Schemes for the Working Poor
Catherine EckelUniversity of Texas, Dallas
Cathleen JohnsonCIrANO
Claude MontmarquetteUniversity of Montreal and CIRANO
Evidence-Based Public Policy: New Tools from Experimental Economic
2005
Catherine EckelUniversity of Texas, Dallas
Cathleen JohnsonCIrANO
Claude MontmarquetteUniversity of Montreal and CIRANO
Evidence-Based Public Policy: New Tools from Experimental Economic
2005
Why Experimental Economics?
Why Experimental Economics?
The effectiveness of a policy can be enhanced substantially if it is tailored to the preferences of the target population
The effectiveness of a policy can be enhanced substantially if it is tailored to the preferences of the target population
New Addition to Economist’s Toolkit
New Addition to Economist’s Toolkit
Has the potential to outperform the two traditional empirical methodologies:
Outcome based measures Survey questions
Has the potential to outperform the two traditional empirical methodologies:
Outcome based measures Survey questions
Advantages of Laboratory Experiments
Advantages of Laboratory Experiments
Decisions involve real money, costly decisions
Real, not hypothetical decisions
Control for situational variation by placing subjects in identical settings
Decisions involve real money, costly decisions
Real, not hypothetical decisions
Control for situational variation by placing subjects in identical settings
Securing External Validity
Securing External Validity
Relevant aspects of the decision-making context are incorporated
Substantial stakes
Relevant aspects of the decision-making context are incorporated
Substantial stakes
Key Research QuestionKey Research Question
Given the right incentive, will the working poor save to invest in human capital? Given the right incentive, will the working poor save to invest in human capital?
The Laboratory Experiment
The Laboratory Experiment
The laboratory experiment focused on three major questions:
The laboratory experiment focused on three major questions:
(1) Will the working poor invest in various assets?
(2) Are these subjects willing to delay consumption for substantial returns? And
(3) How do these subjects view risky choices?
SubjectsSubjects
Community groups whose membership primarily consisted of working poor helped with recruitment
Community groups whose membership primarily consisted of working poor helped with recruitment
SubjectsSubjects
256 subjects 2/3 women Seventy-two percent of subjects partcipate in the
labor market
256 subjects 2/3 women Seventy-two percent of subjects partcipate in the
labor market
SubjectsSubjects
Far from being uneducated 78% high school diploma And 26% university degree
72 percent had a family income of less than 120 percent of Statistics Canada Low Income Cutoff (120-Lico)
Total household income $20-25,000 on average
Far from being uneducated 78% high school diploma And 26% university degree
72 percent had a family income of less than 120 percent of Statistics Canada Low Income Cutoff (120-Lico)
Total household income $20-25,000 on average
Experimental Instruments
Experimental Instruments
Two surveys: Information questions (43)
Socioeconomic Behavioural Attitudinal
Compensated questions (64)
Two surveys: Information questions (43)
Socioeconomic Behavioural Attitudinal
Compensated questions (64)
ProtocolProtocol
$12 Show-up fee, child care and bus fare Practice Choice Questions
Bingo balls used for random draw process Dice were used for gambles
Distributed 2 surveys As individuals finished they left the room and
were paid privately for one choice question
$12 Show-up fee, child care and bus fare Practice Choice Questions
Bingo balls used for random draw process Dice were used for gambles
Distributed 2 surveys As individuals finished they left the room and
were paid privately for one choice question
Compensated Questions - 64Compensated Questions - 64
Investment Preferences Cash v. Investment choices
Time Preferences Cash v. Cash later
Risk Preferences Cash v. Risky cash
Investment Preferences Cash v. Investment choices
Time Preferences Cash v. Cash later
Risk Preferences Cash v. Risky cash
Question 62 You must choose A or B :
Choice A : $100 one week from today Choice B : $400 for your own training or education
These two choices are represented by the two following pictures. Please circle your choice:
$ 100 one week from today
$400 for your own training or
education (expenses refunded)
Choice A
Or
Choice B
Categories of prizes Symbols Cash :
Money (in Canadian dollars) given to you now or at a later date.
Non monetary prizes:
Investment in your education and training: This category includes expenses incurred for your own
education and training: admission fees at an educational institution (professional, collegial or university), purchases of didactic material (books, software, or others).
If you win this prize, we will refund your expenses made during the next year at any educational institutions.
Investment in the education of a family member : This category includes expenses incurred for your children
(or any other family member) education : admission fees at an educational institution (professional, collegial or university), purchases of didactic material (books, software, or others).
If you win this prize, your child (or any other family member) will receive a financial asset (certificate of deposit) bearing interests with a fixed maturity of 5 years .
Investment in your retirement plan : This category is money saved for your retirement. If you win this prize, you will receive a financial asset
(certificate of deposit) bearing interests with a fixed maturity of 7 years .
Purchase or maintenance of durable goods : This category includes any expenses that you are planning to do in
a near future (less than a year) and which are related to the purchase of durable goods (computer, electronic good, car, etc.) or to the maintenance of these goods (home repair, car repair, etc.).
If you win this prize, you will receive a RONA gift certificate.
Investment PreferencesInvestment Preferences
Cash v. Investment Choice Cash alternative made the choice of investment
costly to the subject
pinpoint optimal match rates for the learn$ave demonstration and
Gather the information necessary for determining preference ordering between different forms of investment
Cash v. Investment Choice Cash alternative made the choice of investment
costly to the subject
pinpoint optimal match rates for the learn$ave demonstration and
Gather the information necessary for determining preference ordering between different forms of investment
% of participants choosing own education over $100 one week from today
22.9
43.8
54.6
0.0
10.0
20.0
30.0
40.0
50.0
60.0
$200 $400 $600
Value of own education expense
Figure 1a: All Population
Figure 1b: All Population
22.4
34.5
47.1
0.0
10.0
20.0
30.0
40.0
50.0
60.0
500cd/$250 500cd/$166 $600cd/$100
Labour Force Participants
Non-Labour Force Participants
% of participants choosing family member’s education over $100 one week from today
% of participants choosing education of a family member over cash one week from today
53.3
63.3
73.3
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
500cd/$250 500cd/$166 $600cd/$100
Ratio of deposit value of certificate of deposit (cd) over cash
25
37
47
0
510
1520
25
3035
4045
50
500 GIC/$250 500 GIC/$166 $600 GIC/$100
Ratio of GIC over cash
% participants that chose retirement savings over cash one week from the day of the experiment
Time PreferenceTime Preference
We elicit a series of time preferences by asking subjects when they prefer to take their compensation
Choices vary in terms of initial payoffs and alternative payoffs with respect to
day lapsed and discount rates
We elicit a series of time preferences by asking subjects when they prefer to take their compensation
Choices vary in terms of initial payoffs and alternative payoffs with respect to
day lapsed and discount rates
Time PreferenceTime Preference
Using these responses
Measure overall degree of patience
Shape of the subject’s discount function
Using these responses
Measure overall degree of patience
Shape of the subject’s discount function
Question 23 You must choose between two payoffs A or B :
Choice A: $73.15 two weeks from today Choice B: $84.37 six weeks from today
Remember: Today is : 24 November 2000 Circle the date ON the calendar, and you will receive payment ON that date.
24/Nov 25/Nov 26/Nov 27/Nov 28/Nov 29/Nov 30/Nov
1/Dec 2/Dec 3/Dec 4/Dec 5/Dec 6/Dec 7/Dec
8/Dec 9/Dec 10/Dec 11/Dec 12/Dec 13/Dec 14/Dec $ 73.15
15/Dec 16/Dec 17/Dec 18/Dec 19/Dec 20/Dec 21/Dec
22/Dec 23/Dec 24/Dec 25/Dec 26/Dec 27/Dec 28/Dec
29/Dec 30/Dec 31/Dec 1/Jan 2/Jan 3/Jan 4/Jan
5/Jan 6/Jan 7/Jan 8/Jan 9/Jan 10/Jan 11/Jan $ 84.37
Time PreferenceTable 2
Description of Time Preference Questions
Questions # Today Tomorrow Next Week
Two weeks
Days lapsed
Alternative payoff
Discount Rate
6 R1 $71.50 2 $71.54 10.00% 2 $71.15 3 $71.21 10.00%
17 $71.20 7 $71.34 10.00% 12 $71.10 14 $71.37 10.00% 4 $71.00 28 $71.54 10.00% 9 R2 $72.00 2 $72.20 50.00% 3 $72.15 3 $72.45 50.00%
13 $72.25 7 $72.94 50.00% 10 $72.10 14 $73.48 50.00% 8 $72.05 28 $74.81 50.00%
19 R3 $73.25 2 $74.05 200.00% 11 $73.10 3 $74.30 200.00% 14 $73.00 7 $75.80 200.00% 21 $73.30 14 $78.92 200.00% 18 $73.15 28 $84.37 200.00% 20 R3 $73.25 2 $74.05 200.00% 22 $73.10 3 $74.30 200.00% 15 $73.00 7 $75.80 200.00% 24 $73.30 14 $78.92 200.00% 25 $73.15 28 $84.37 200.00% 26 R3 $73.25 2 $74.05 200.00% 16 $73.10 3 $74.30 200.00% 5 $73.00 7 $75.80 200.00%
28 $73.30 14 $78.92 200.00% 23 $73.15 28 $84.37 200.00%
Creating IndexesCreating Indexes
It is well known that impatience and attitude toward risk influence both the decisions to invest in human capital and to save for future consumption
Our experiment uses choice questions with monetary payoffs to construct measures of these characteristics
It is well known that impatience and attitude toward risk influence both the decisions to invest in human capital and to save for future consumption
Our experiment uses choice questions with monetary payoffs to construct measures of these characteristics
Determinants of the Impatience Index for
Each Individual
Determinants of the Impatience Index for
Each Individual Younger subjects and men favour the earliest
choices We can conclude that the women were more
patient than the men in our sample, choosing on average to delay payment for three more decisions than men
The number of children does not seem to affect patience
Younger subjects and men favour the earliest choices
We can conclude that the women were more patient than the men in our sample, choosing on average to delay payment for three more decisions than men
The number of children does not seem to affect patience
256
Determinants of the Proportion of Subjects Choosing Early
Payoff
Determinants of the Proportion of Subjects Choosing Early
Payoff
Delaying alternative payoff reduces the incentive to pick the latest alternative
Increasing the rate of return induces subjects to delay reward
Absolute difference encourages the subjects to delay their reward
Delaying alternative payoff reduces the incentive to pick the latest alternative
Increasing the rate of return induces subjects to delay reward
Absolute difference encourages the subjects to delay their reward
Risk PreferenceRisk Preference
Elicit the participant’s attitude towards risk
Obtain a behavioural measure of risk aversion with 14 pairs of lottery questions
Risk aversion for monetary payoffs
Elicit the participant’s attitude towards risk
Obtain a behavioural measure of risk aversion with 14 pairs of lottery questions
Risk aversion for monetary payoffs
Question 38 You must choose A or B : You will be asked to roll two ten-sided dice. The sum of the dice will be a number from 1 to 100.
Choice A: If the sum of the dice is a number between 1 and 100, you win $60 (100% chance).
Choice B: If the sum of the dice is a number between 1 and 50, you win $120 (50%
chance). If the sum is a number between 51 and 100, you win nothing (50% chance). These two choices are represented by the two following pictures:
$60
1 100
$120
$0
1 50 51 100
Circle A or B according to your choice: A B
Table 3 Description of the Lottery Questions
Question # Lotteries Safe (S) (less risky) Risky (R) (more risky)
38 ($60;1) ($120;.5) or ($0;.5) 39 ($100;1) ($200;.5) or ($0;.5) 40 ($60;1) ($240;.25) or ($0;.75) 41 ($100;1) ($400;.25) or ($0;.75) 42 ($60;1) ($80;.75) or ($0;.25) 43 ($100;1) ($133.33;.75) or ($0;.25) 44 ($100;.5) or ($0;.5) ($200;.25) or ($0;.75) 45 ($100;.40 or ($0;.60) ($400;.10) or ($0;.90) 46 ($60;1) ($80;.5) or ($40;.5) 47 ($80;1) ($100;.5) or ($60;.5) 48 ($120;1) ($175;.8) or ($0;.2) 49 ($40;1) ($90;.5) or ($0;.5) 50 ($75;1) ($275;.30) or ($0;.7) 51 ($120;.5) ($175;.4) or ($0;.6)
Risk Preference
Risk Aversion IndexRisk Aversion Index
LESS RISKY CHOICES is a simple count of the number of times the subject has chosen the safest payoff (0-14)
LESS RISKY CHOICES is a simple count of the number of times the subject has chosen the safest payoff (0-14)
Descriptive StatisticsDescriptive Statistics
16.4 % of sample always chose the earliest payoff (5.1% always saved)
16.4 % of sample always chose the safest lottery payoff (2.3% riskiest)
15.2% chose cash over every investment option (5.5% investment over cash)
16.4 % of sample always chose the earliest payoff (5.1% always saved)
16.4 % of sample always chose the safest lottery payoff (2.3% riskiest)
15.2% chose cash over every investment option (5.5% investment over cash)
AnalysisAnalysis
Education PreferenceOverall intensity of preference for education
(No, some, strong, very strong)
Is a function of Time Preference (experimentally measured) Risk Preference (experimentally measured) Other attitudes and perceptions (survey) Socioeconomic characteristics (survey)
Education PreferenceOverall intensity of preference for education
(No, some, strong, very strong)
Is a function of Time Preference (experimentally measured) Risk Preference (experimentally measured) Other attitudes and perceptions (survey) Socioeconomic characteristics (survey)
Determinants of Choosing Educational Expenses over
Cash
Determinants of Choosing Educational Expenses over
Cash Impatient subjects exhibit a higher probability to
choose cash over education More risk averse subjects show a lower
probability of investing in human capital Younger subjects more likely to invest Those with some post secondary education were
also more likely to invest
Impatient subjects exhibit a higher probability to choose cash over education
More risk averse subjects show a lower probability of investing in human capital
Younger subjects more likely to invest Those with some post secondary education were
also more likely to invest
Probabilities of Investing in Own Education
Probabilities of Investing in Own Education
Never Invest Always Invest
Most Patient 0.24 0.43
Least Patient 0.64 0.10
Risk Seeking 0.36 0.32
Risk Averse 0.51 0.19
Determinants of Choosing Cash over Family Member’s
Education
Determinants of Choosing Cash over Family Member’s
Education
Children increase probability of investment Students have higher probability of choosing
cash Impatient subjects have higher probability of
taking cash Risk aversion measure plays no role
Children increase probability of investment Students have higher probability of choosing
cash Impatient subjects have higher probability of
taking cash Risk aversion measure plays no role
Probabilities of Investing in Family Member’s EducationProbabilities of Investing in Family Member’s Education
Never Invest Always Invest
Most Patient 0.25 0.40
Least Patient 0.61 0.12
Risk Seeking 0.35 0.31
Risk Averse 0.50 0.19
What Have We Learned So Far? What Have We Learned So Far?
In general, the working poor in our sample are risk averse and impatient
Nevertheless, many can be induced to invest in their own education
44 percent accepted analogous learn$ave offer Overall, own educational expenses was preferred
to family member’s education and retirement savings
Some couldn’t be induced to invest in any asset even when return approached 500%
In general, the working poor in our sample are risk averse and impatient
Nevertheless, many can be induced to invest in their own education
44 percent accepted analogous learn$ave offer Overall, own educational expenses was preferred
to family member’s education and retirement savings
Some couldn’t be induced to invest in any asset even when return approached 500%
What Have We Learned So Far?What Have We Learned So Far?
Savings programs may benefit from higher take-up rates if they
Offer high returns Stress absolute returns Allow short term savings horizons
Savings programs may benefit from higher take-up rates if they
Offer high returns Stress absolute returns Allow short term savings horizons