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