Endogenous time horizon and behavioral poverty trap: Theory and evidence from Mozambique
Abstract This paper provides a model where a long-term planning horizon improves economic decisions but also increases the salience of anticipated future utility. Hence, a gloomy future induces the agent to shorten her time horizon in order to reduce distress caused by the anticipation of poverty, at the cost of worsening her realized future consumption, resulting in a behavioral poverty trap where poverty and shortsightedness reinforce each other. The paper also provides primary empirical evidence of the endogenous determination of time horizon and of the existence of a behavioral poverty trap. Using a randomized controlled trial in Mozambique that provided agro-input subsidies and a Matched Savings program, I show that improvement in economic prospects resulted in a significant increase in the planning horizon of the poor beneficiaries. Moreover, the increase in horizon significantly predicts asset accumulation of beneficiaries during the two years following the intervention.