In 2014, while I was completing my M.S. degree at MSU, I worked as a research assistant on a data collection project in Mon State Myanmar. As part of this work, I designed a module to be included in a larger household survey that aimed to measure the hopes and aspirations of respondents. That initial work, which was largely a data validation effort, was published in the Journal of Development Studies in 2018.
I am now very happy to report that my paper investigating the relationship between aspirations and investment choices, using these data, is now forthcoming in the Journal of Economic Inequality. Here is the abstract:
“The aspirations gap is the distance between an individual’s current and aspired standard of livelihood. A growing theoretical literature predicts that aspirations both “too close” and “too far” away from current standards lead to less investment in the future. These theories imply an inverted U-shaped relationship between the aspirations gap and investments. I test this hypothesis and extend existing empirical findings to rural Myanmar by examining the relationship between the income aspirations gap and real estate investment choices. I find that income aspirations that are ahead, but not too far ahead, of current income levels provide the best incentive for investment. Analysis of heterogeneity highlights that this relationship is strongest for those with relatively low income and those who hold fatalistic beliefs. These findings suggest the presence of psychological constraints to poverty alleviation and development in rural Myanmar.”
Genicot and Ray (2017) in their Econometrica paper, “Aspirations and Inequality” develop a theory of socially determined aspirations and how these aspirations interact with macroeconomic economic growth and economic inequality. Their theory shows that fast growth in a poor country can either (i) inspire powerful aspirations and incentives to invest or (ii) lead to frustration and discourage investment. Taken together, this implies that the relationship between aspirations and investments is non-linear and, more specifically, shaped like an inverted U.
I test this theoretical prediction in rural Myanmar, a context that has experienced extremely fast economic growth at the national level (8.6 percent in 2015) while at the same time has a large share of its population living in poverty (32 percent in 2015). Using the data I collected in Mon State, a coastal region in Southern Myanmar close to the border with Thailand, I construct a measure of each respondent’s income aspiration gap (e.g., the distance between their current and aspired income) and estimate the relationship between this measure and investments—measured as spending on land and household materials.
I find evidence that supports the theory of Genicot and Ray (2017). The above figure shows non-parametric estimation results of the relationship between the income aspirations gap and investment. This finding adds to the existing literature—which I’ve previously blogged about—showing, for example, an inverted U-shaped relationship between income aspirations and saving in Nepal and occupation aspirations and spending on education in India. I add to this literature by showing that this inverted U-shaped relationship is robust to alternative measures of aspirations and is very likely not driven by unobserved confounding variables.
But, I think the most interesting and (if I may say so) novel finding in my paper is the observable heterogeneity within this relationship. Consistent with existing comparative static analysis, I find that this inverted U-shaped relationship really only holds among those with relatively low-income and those who hold fatalistic beliefs about the future. The figure below shows non-parametric estimates of the relationship between the income aspirations gap and investments split between relatively low-income respondents (in panel A) and relatively high-income respondents (in panel B). For those with relatively high-income, more aspirations are associated with more investments but this is not so for those with relatively low-income. The same holds when splitting the sample between those with and without fatalistic beliefs.
This investigation into the heterogeneity in the inverted U-shaped relationship is important because it highlights a mechanism by which psychological poverty traps may operate. In a context with fast economic growth on average and a high share of the population living in poverty, relatively low-income individuals may experience aspirations frustration, may make fewer investments, and therefore may remain poor. This finding also highlights that aspirations by themselves are not necessarily sufficient to inspire future-oriented behavior. Rather, aspirations must be accompanied by attitudes and beliefs in one’s own ability to achieve a given aspiration. This is constant with a model of the “economics of hope,” which integrates insights from psychology and development economics—and is discussed in a recent post on Bruce Wydick’s blog.