Negative Income Shocks Increase Discount RatesWe thank Florian Bosshart, Amélie Brune, and Deborah Kistler for excellent research assistance. This research was supported by Cogito Foundation Grant R-116/10 and NIH Grant R01AG039297 to Johannes Haushofer

Poor individuals often exhibit higher discount rates than richer individuals, and negative income shocks have been linked to increases in discounting. However, it remains unknown whether this effect is causal, and whether is due to beliefs or preferences: increases in discount rates in poverty or after negative income shocks could either be due to (beliefs about) more severe environmental constraints in contexts of poverty, or to direct effects of poverty or income shocks on preferences. Here we address these questions in a laboratory experiment in which subjects receive different starting endowments which create “rich” and “poor” groups. All participants then perform a real effort task to earn money, following which subgroups of participants receive positive and negative income shocks. Subsequently we measure discount rates, effort provision, social preferences, reservation wages, and psychological outcomes. We find that negative income shocks lead to an increase in time discounting. In contrast, positive income shocks weakly decrease discount rates. Discount rates are not affected by mean levels of wealth (“rich” vs. “poor”). The effect of negative income shocks on the discount rate is specific to short-run discounting, i.e. negative income shocks increase decreasing impatience. No strong effects were found on effort provision, social preferences, reservation wages, and psychological outcomes. Together, these findings suggest that income shocks have a direct causal effect on discount rates that is not explained by wealth levels. ∗We thank Florian Bosshart, Amélie Brune, and Deborah Kistler for excellent research assistance. This research was supported by Cogito Foundation Grant R-116/10 and NIH Grant R01AG039297 to Johannes Haushofer. †Program in Economics, History, and Politics, Harvard University, Abdul Latif Jameel Poverty Action Lab, MIT, and Department of Economics, University of Zurich. [email protected] ‡Department of Economics, Mainz University. [email protected] §Department of Economics, University of Zurich. [email protected]