Budget Neglect in Consumption Smoothing: A Field Experiment on Seasonal Hunger
Most behavioral models predict that people misallocate consumption over time due to non-standard preferences. We focus on an alternative explanation: budget neglect. We posit that keeping track of uncertain outflows is cognitively challenging, which leads people to fundamentally misunderstand their budget constraint and consequently create unrealistic plans. We establish the empirical relevance of budget neglect using a field experiment in Zambia that focused on the hungry season, the months leading up to harvest when farming households experience a consistent and dramatic drop in consumption. We first document that even experienced farmers start with unrealistic beliefs about how their consumption and stock will evolve over the year. We then randomly assign a budgeting intervention designed to help these farmers estimate future expenditures across different categories. We show that our intervention changes their budget allocations, lowers their willingness to pay for discretionary consumption goods, and lowers their consumption prior to the hungry season. Due to these behavioral changes, households enter the hungry season with increased savings equal to an additional month of consumption, and self-finance an increase in farm investment leading to a 10% increase in harvest revenue. Finally, we discuss how ``budget neglect’‘ can continue in the face of experience, given uncertain expenditures and farmers’ biased recollections of their past experiences.

Please sign up for meetings here: docs.google.com/spreadsheets/d/1JCU5l6ELVTtTGnGAvCRudlRHwmLpizIevH_cXtX0lk0/edit#gid=0
Date: 16 February 2021, 16:00 (Tuesday, 5th week, Hilary 2021)
Venue: Held on Zoom
Speaker: Supreet Kaur (UC Berkeley)
Organising department: Department of Economics
Part of: Applied Microeconomics Seminar
Booking required?: Not required
Audience: Members of the University only
Editor: Melis Clark