Transcript No Slide Title

Learning Incentive Schemes
for the Working Poor
Catherine Eckel
University of Texas, Dallas
Cathleen Johnson
CIrANO
Claude Montmarquette
University of Montreal and CIRANO
Evidence-Based Public Policy: New Tools from
Experimental Economic
2005
Why Experimental
Economics?

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

Has the potential to outperform the two
traditional empirical methodologies:


Outcome based measures
Survey questions
Advantages of
Laboratory Experiments

Decisions involve real money, costly decisions

Real, not hypothetical decisions

Control for situational variation by placing
subjects in identical settings
Securing External
Validity


Relevant aspects of the decision-making context
are incorporated
Substantial stakes
Key Research Question
Given the right incentive, will the working poor
save to invest in human capital?
The Laboratory
Experiment
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?
Subjects

Community groups whose membership primarily
consisted of working poor helped with
recruitment
Subjects



256 subjects
2/3 women
Seventy-two percent of subjects partcipate in the
labor market
Subjects

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
Two surveys:


Information questions (43)
 Socioeconomic
 Behavioural
 Attitudinal
Compensated questions (64)
Protocol


$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 - 64

Investment Preferences


Time Preferences


Cash v. Investment choices
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
$400 for your own training or
education
(expenses refunded)
Or
Choice A
Choice B
Categories of prizes
Cash :
Money (in Canadian dollars) given to you now or at a later
date.
Non monetary prizes:
Investment in your education and training:

This category includes expenses incurred for your own
education and training: admission fees at an educational
institution (professional, collegial or university), purchases of
didactic material (books, software, or others).

If you win this prize, we will refund your expenses made
during the next year at any educational institutions.
Investment in the education of a family member :

This category includes expenses incurred for your children
(or any other family member) education: admission fees
at an educational institution (professional, collegial or
university), purchases of didactic material (books, software,
or others).

If you win this prize, your child (or any other family member)
will receive a financial asset (certificate of deposit) bearing
interests with a fixed maturity of 5 years.
Investment in your retirement plan :

This category is money saved for your retirement.

If you win this prize, you will receive a financial asset
(certificate of deposit) bearing interests with a fixed
maturity of 7 years.
Purchase or maintenance of durable goods :

This category includes any expenses that you are planning to do in
a near future (less than a year) and which are related to the
purchase of durable goods (computer, electronic good, car, etc.) or
to the maintenance of these goods (home repair, car repair, etc.).

If you win this prize, you will receive a RONA gift certificate.
Symbols
Investment Preferences

Cash v. Investment Choice



Cash alternative made the choice of investment
costly to the subject
pinpoint optimal match rates for the learn$ave
demonstration and
Gather the information necessary for determining
preference ordering between different forms of
investment
Figure 1a: All Population
% of participants choosing own education over $100 one week
from today
60.0
54.6
50.0
43.8
40.0
30.0
22.9
20.0
10.0
0.0
$200
$400
Value of own education expense
$600
Figure 1b: All Population
% of participants choosing education of a family member over
cash one week from today
60.0
47.9
50.0
40.0
30.0
36.0
24.4
20.0
10.0
0.0
500cd/$250
500cd/$166
$600cd/$100
Ratio of deposit value of certificate of deposit (gic) over cash
% of participants choosing family member’s
education over $100 one week from today
60.0
47.1
50.0
Labour Force
Participants
40.0
34.5
30.0
22.4
20.0
10.0
0.0
500cd/$250
500cd/$166
$600cd/$100
% of participants choosing education of a family member over cash
one week from today
80.0
73.3
70.0
Non-Labour Force
Participants
60.0
63.3
53.3
50.0
40.0
30.0
20.0
10.0
0.0
500cd/$250
500cd/$166
$600cd/$100
Ratio of deposit value of certificate of deposit (cd) over cash
% participants that chose retirement savings over cash
one week from the day of the experiment
50
45
40
35
30
25
20
15
10
5
0
47
37
25
500 GIC/$250
500 GIC/$166
Ratio of GIC over cash
$600 GIC/$100
Time 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
Time Preference

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
73.15
9/Dec
10/Dec
11/Dec
12/Dec
13/Dec
14/Dec
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
84.37
6/Jan
7/Jan
8/Jan
9/Jan
10/Jan
11/Jan
Time Preference
Table 2
Description of Time Preference Questions
Questions #
6
2
17
12
4
9
3
13
10
8
19
11
14
21
18
20
22
15
24
25
26
16
5
28
23
Today
Tomorrow
R1
R3
R3
Two
weeks
Days
lapsed
Alternative
payoff
$73.25
$73.10
$73.00
$73.30
$73.15
2
3
7
14
28
2
3
7
14
28
2
3
7
14
28
2
3
7
14
28
2
3
7
14
28
$71.54
$71.21
$71.34
$71.37
$71.54
$72.20
$72.45
$72.94
$73.48
$74.81
$74.05
$74.30
$75.80
$78.92
$84.37
$74.05
$74.30
$75.80
$78.92
$84.37
$74.05
$74.30
$75.80
$78.92
$84.37
$71.50
$71.15
$71.20
$71.10
$71.00
$72.00
$72.15
$72.25
$72.10
$72.05
R2
R3
Next
Week
$73.25
$73.10
$73.00
$73.30
$73.15
$73.25
$73.10
$73.00
$73.30
$73.15
Discount
Rate
10.00%
10.00%
10.00%
10.00%
10.00%
50.00%
50.00%
50.00%
50.00%
50.00%
200.00%
200.00%
200.00%
200.00%
200.00%
200.00%
200.00%
200.00%
200.00%
200.00%
200.00%
200.00%
200.00%
200.00%
200.00%
Creating 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
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
256
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
Risk 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
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
100
1
$0
$120
1
50
Circle A or B according to your choice:
100
51
A
B
Risk Preference
Table 3
Description of the Lottery Questions
Question #
38
39
40
41
42
43
44
45
46
47
48
49
50
51
Lotteries
Safe (S) (less risky)
($60;1)
($100;1)
($60;1)
($100;1)
($60;1)
($100;1)
($100;.5) or ($0;.5)
($100;.40 or ($0;.60)
($60;1)
($80;1)
($120;1)
($40;1)
($75;1)
($120;.5)
Risky (R)
($120;.5)
($200;.5)
($240;.25)
($400;.25)
($80;.75)
($133.33;.75)
($200;.25)
($400;.10)
($80;.5)
($100;.5)
($175;.8)
($90;.5)
($275;.30)
($175;.4)
(more risky)
or
($0;.5)
or
($0;.5)
or
($0;.75)
or
($0;.75)
or
($0;.25)
or
($0;.25)
or
($0;.75)
or
($0;.90)
or
($40;.5)
or
($60;.5)
or
($0;.2)
or
($0;.5)
or
($0;.7)
or
($0;.6)
Risk Aversion Index

LESS RISKY CHOICES is a simple count of the
number of times the subject has chosen the
safest payoff (0-14)
Descriptive Statistics



16.4 % of sample always chose the earliest payoff
(5.1% always saved)
16.4 % of sample always chose the safest lottery
payoff (2.3% riskiest)
15.2% chose cash over every investment option
(5.5% investment over cash)
Analysis
Education Preference
Overall intensity of preference for education
(No, some, strong, very strong)
Is a function of




Time Preference (experimentally measured)
Risk Preference (experimentally measured)
Other attitudes and perceptions (survey)
Socioeconomic characteristics (survey)
Determinants of Choosing
Educational Expenses over
Cash




Impatient subjects exhibit a higher probability to
choose cash over education
More risk averse subjects show a lower
probability of investing in human capital
Younger subjects more likely to invest
Those with some post secondary education were
also more likely to invest
Probabilities of Investing in
Own Education
Never Invest
Always Invest
Most Patient
0.24
0.43
Least Patient
0.64
0.10
Risk Seeking
0.36
0.32
Risk Averse
0.51
0.19
Determinants of Choosing
Cash over Family Member’s
Education




Children increase probability of investment
Students have higher probability of choosing
cash
Impatient subjects have higher probability of
taking cash
Risk aversion measure plays no role
Probabilities of Investing in
Family Member’s Education
Never Invest
Always Invest
Most Patient
0.25
0.40
Least Patient
0.61
0.12
Risk Seeking
0.35
0.31
Risk Averse
0.50
0.19
What Have We Learned So Far?





In general, the working poor in our sample are risk
averse and impatient
Nevertheless, many can be induced to invest in
their own education
44 percent accepted analogous learn$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?

Savings programs may benefit from higher takeup rates if they
 Offer high returns
 Stress absolute returns
 Allow short term savings horizons