Myopic preferences or subsistence income among rickshaw cyclists
International Journal of Development Issues
ISSN: 1446-8956
Article publication date: 7 September 2015
Abstract
Purpose
The purpose of this paper is to investigate why poor people make decisions that at first sight appear irrational. The author stays within the realms of classical consumption theory, and investigates preference-based explanations. The author studies the case of rickshaw rental versus purchase. One-year rent is sufficient to buy a rickshaw in the plains of Nepal, while a rickshaw will last many years, so purchase appears very profitable. Still most cyclists rent the rickshaw.
Design/methodology/approach
Based on choices made by rickshaw cyclists between hypothetical financing schemes for rickshaws we investigate whether the explanation is a high time-preference rate or a high elasticity of the marginal utility of consumption, which in turn can be explained by preferences that are formed by consumption near a subsistence level.
Findings
The authors find that subsistence constraints are more important than high time-preference rates. In short, many rickshaw cyclists switch from profitable investment decisions to myopic choices if the weekly payments are too high.
Research limitations/implications
In contrast to standard bidding-forms, the methodology does not allow for exact estimates of the implied time-preference rate or the elasticity of the marginal utility of consumption.
Practical implications
Microcredit has no role if people are subsistence constraint, as they will need to save every day also to repay loans.
Social implications
The findings indicate that myopic choices by poor people are not due to myopic preferences, but rather that the disutility of reducing consumption today is too high.
Originality/value
The authors believe bidding-forms are too complex for field experiments among people with no, or minimal, education. The simple hypothetical choices we have constructed appear to work.
Keywords
Acknowledgements
Data were collected with the help of National Labour Academy, Kathmandu. The research was funded by the Research Council of Norway (RCN). After the funding decision, which was based on a research proposal designed by the author, the RCN has not been involved in the research process.
Citation
Hatlebakk, M. (2015), "Myopic preferences or subsistence income among rickshaw cyclists", International Journal of Development Issues, Vol. 14 No. 3, pp. 204-214. https://doi.org/10.1108/IJDI-02-2015-0010
Publisher
:Emerald Group Publishing Limited
Copyright © 2015, Emerald Group Publishing Limited