Explaining Poverty’s Vicious Circle

For so long, Sevin Yeltekin, associate professor of economics, worked in designing tax systems and social-insurance instruments to resolve a variety of problems. Yet she was intrigued by a particular consumer behavior and personal decision: How people decide how much — if at all — to save.

So Yeltekin and two colleagues studied poverty’s vicious cycle via game theory. What they found, in a paper published in Econometrica in fall 2015, analyzes a middle-ground approach to helping people climb above the poverty line. Primarily, they seek to advocate a workable threshold of debt, assets and potential credit, internally reinforced by behavior and externally driven by devices or systems — such as fixed deposit or lockbox retirement accounts.

“So there are two extreme camps,” said Yeltekin, who co-authored “Poverty and Self-Control” with B. Douglas Bernheim of Stanford and Debraj Ray of NYU. “There are people who think that persistent poverty is not a choice and we should help the poor unconditionally and, if necessary, permanently. And there are people who think that being stuck in poverty is largely a choice due to bad consumption and saving habits, and it’s up to these individuals to escape poverty by modifying such behaviors. One argument from this second camp suggests that if we didn’t have Social Security, people wouldn’t rely on it and would save on their own. There are a lot of arguments on both sides. So this research tries to make sense of these arguments and put more structure to them. Our paper shows that the poor do need help, but they don’t need help as much or as long as some people fear. With some initial help and the right incentives after, they can help themselves and escape permanent poverty.”

The coauthors suggest that there is no single method such as forcing savings plans or loosening constraints on credit. Rather, it’s a combination of reinforcing internal behaviors and designing processes for asset accumulation and saving, especially when people have behavioral preferences that make them reluctant savers.

“The people in the ‘anti-help’ category think it’s a permanent position, and there always will be some sort of public subsidies going on. But that’s not the case,” Yeltekin said. “What this speaks to is that we actually can design ways to contend with such poverty.

“When people have ... this ‘I’ll worry about the future tomorrow’ type of behavior, we can actually resolve these issues. The design of credit, taxation and savings instruments in a variety of settings is what I’m interested in.”

Sevin Yeltekin, associate professor of economics