Formation of Aspirations - An Empirical Analysis

Formation of Aspirations – An Empirical Analysis Tanguy Bernard1, Stefan Dercon2, Fanaye Tadesse1, Alemayehu Seyoum Taffesse1 and Ibrahim Worku1 1 International Food Policy Research Institute 2 University of Oxford March 20, 2012 CSAE Conference 2012 ‘Economic Development in Africa’ Oxford, UK19/04/12 1

Motivation – why aspirations• Development discourse and praxis focus on ‘opportunities’• Why do the poor not ‘invest’? – Ethiopians and fatalism?• A variety of mostly complementary explanations have been forwarded over the years. – Low returns to investments – Example: no schools, lack of credit (market failures); – Unexploited opportunities due to lack of information/knowledge about the opportunities/returns – Example: insufficient observable cases; – Social constraints dampen the economic attractiveness of investment opportunities – Example: egalitarian norms, very high taxation, excessive regulations’ 19/04/12 2

Motivation – why aspirations • Focus - ‘external circumstances’ and ‘opportunities’,• Shift in focus - constraints associated with the manifested attributes of decision makers – Identity issues: People’s choices are conditioned by their sense of self – Example: stereotype roles; – Psychological issues: impatience, commitment, and psychological barriers and similar reasons identified by the behavioural economics literature – Example: loss aversion and the consequent preference for the status quo; 19/04/12 3

Motivation – why aspirations• the aspirations failure approach:– attempts to blend external constraints that the poor face with the potential effect these constraints may have on the internal logic governing choice by them;– affords an alternative characterisation of what appears to be fatalism (Ethiopia) 04/19/12 4

Elements of the Aspirations PerspectiveWhat are aspirations? Aspirations have two distinctive features:• Future-oriented - are goals that can only be satisfied at some future time (differ from immediate gratifications);• Motivators - are goals individuals are willing, in principle, to invest time, effort or money in to attain (different from idle daydreams and wishes) Note: the ‘willingness to invest’ is ‘potential’, or ‘conditional’ Ref: Simon (1977), Selten (1999), Appadurai (2002), Ray (2003) 04/19/12 5

Elements of the Aspirations PerspectiveWhy are aspirations important/useful?Aspirations (or the capacity to aspire):• Reflect bounded rationality;• Are socially determined (social interaction);• Are distributed unevenly within communities. – Condition individual behaviour and well-being – Useful device in analysing and/or addressing poverty 04/19/12 6

Framework19/04/12 7

Wealth Aspiration - DataRound 7 Question: We would now like you to think of your own wealth. Thinking ofa scale from 1 (the lowest or worst level) to 10 (the highest or best level):Q39a. At what level do you believe you are currently?Q39b. At what level would you like to be?Estimation•Use responses to Q39b as the dependent variable;•Responses to the wealth aspiration question are ordered – – ordered probit model; – Generalized ordered probit model – Semi-nonparametric estimation of extended ordered probit model•Clustered standard errors 04/19/12 8

Data - ERHS Survey Rounds • Spatial coverage: 15 Kebeles (villages); • Temporal coverage: 1993/94-2008/9 (7 rounds the last three roughly one every 5 years)04/19/12 9

Variables – All survey rounds Level of wealth the respondent would like to achieveWealth Aspiration (measured using a 10-point scale)Age Respondents age in number of yearsAge squared Respondents age in number of years (squared)Gender (male=1) Gender of respondent Dummy - the respondent engages in non-farm activitiesNon-farm activities (yes=1) (Yes=1) Dummy - the respondent is a member of an Iddir (funeralIddir (member=1) association) (Member=1)Married (yes=1) Marital status of the respondent (married=1) Shock faced by respondent in the last 5 years - indexShocks calculated using principal components Number of neighbours within a radius of 500m from theNeighbourhood size respondents residence Average growth in the real consumption per capita (in 1994Average income growth of prices) of the respondents neighbours between Rounds 6 andneighbours (round7-round6) 7 (%).Income growth (round 2 - round 1) Growth in the real consumption per capita (in 1994 prices) of- the respondents household between successive surveyIncome growth (round 7 - round 6) Rounds (%) Number of rounds the respondents family was classified asPoor poor (using the poverty line in 1994) 19/04/12 10

Internal Locus of Control – Round 7 1 .8 .6 .4 .2 0 2 4 6 8 selfreported_wealth Pr(internal_loc) 95% CI Fitted values19/04/12 11

Marginal (Partial) Effects – All Rounds dy/dx per one SD change (%) Average income Income Income Married growth of growth growth Poor (yes=1) neighbors (R6 – R7) (R5–R6) (R6-R7)Pr(Wealth Aspiration = 1) -0.25 -0.13 -0.09 -0.10 0.18Pr(Wealth Aspiration = 2) -0.60 -0.34 -0.23 -0.26 0.31Pr(Wealth Aspiration = 3) -1.50 -0.89 -0.60 -0.68 0.83Pr(Wealth Aspiration = 4) -2.01 -1.27 -0.86 -0.96 1.17Pr(Wealth Aspiration = 5) -2.73 -1.83 -1.24 -1.37 1.70Pr(Wealth Aspiration = 6) -2.08 -1.56 -1.07 -1.18 1.45Pr(Wealth Aspiration = 7) 0.15 -0.21 -0.14 -0.16 0.19Pr(Wealth Aspiration = 8) 9.01 6.50 5.37 5.97 -5.84 Mean (SD) -18.2 (32.5) -18.3 (53.7) 2.2 (59.7) 2.8 (1.8)Note: Figures in red are statistically significant at least at 10% level of significance. 19/04/12 12

Variables – Rounds 6-7 Level of wealth the respondent would like to achieveWealth Aspiration (measured using a 10-point scale)Age Respondents age in number of yearsAge squared Respondents age in number of years (squared)Gender (male=1) Gender of respondent Dummy - the respondent engages in non-farm activitiesNon-farm activities (yes=1) (Yes=1) Dummy - the respondent is a member of an IddirIddir (member=1) (funeral association) (Member=1)Married (yes=1) Marital status of the respondent (married=1) Shock faced by respondent in the last 5 years - indexShock calculated using principal components Number of neighbours within a radius of 500m from theNeighbourhood size respondents residence Logarithm of the value of assets (including farmLog of asset value implements, furniture, jewelry) the respondent’s household owned in survey round 7 (2008/09) Logarithm of the average value of assets owned by theLog of average asset value of respondents neighbours (residents within 500m radiusneighbors of the respondents house) excluding the respondent’s 19/04/12 household 13

Marginal (Partial) Effects – Rounds 6-7 dy/dx per one SD change (%) Log of average Gender Log of asset asset value of (male=1) value neighborsPr(Wealth Aspiration = 1) 0.01 -0.04 -0.04Pr(Wealth Aspiration = 2) 0.01 -0.04 -0.04Pr(Wealth Aspiration = 3) 0.05 -0.12 -0.10Pr(Wealth Aspiration = 4) 0.11 -0.30 -0.34Pr(Wealth Aspiration = 5) 0.30 -0.85 -1.02Pr(Wealth Aspiration = 6) 0.45 -1.34 -1.43Pr(Wealth Aspiration = 7) 0.74 -2.20 -2.45Pr(Wealth Aspiration = 8) 0.74 -2.07 -2.45Pr(Wealth Aspiration = 9) 0.18 -0.50 -0.57Pr(Wealth Aspiration = 10) -2.63 7.44 8.51 Mean (SD) 7.1 (1.2) 7.7 (0.7)Note: Figures in red are statistically significant at least at 10% level of significance. 14 19/04/12

Observations Poorer individuals seem to have lower aspirations; Correlations but note that most of the relevant variables lagged; Results persist across models; Encouraging result since data not designed for the purpose;19/04/12 15

Elements of the Aspirations Perspective Aspiration Aspiration level Aspiration window and gap failure Well-being Efforts to improve Aspired Attained Gap19/04/12 16

Elements of the Aspirations PerspectiveMeasurement Issues• Aspirations are not directly observable – Revealed by observed behaviour: interpretation issues (linking aspirations and behaviour) – Elicited using subjective questions: measurement issues• Limits to subjective assessment: – subjects’ willingness to report private knowledge, evaluation apprehension, and subject role playing – attributes of the instrument used: prior questions (anchoring), the number of categories on the rating scale, the adjectives that are used as the endpoints of the rating scale, and the adverbs that describe scale categories. (e.g. Delavande et al. (2009), Bertrand and Mullainathan (2001) for some reviews) 19/04/12 17

Elements of the Aspirations PerspectiveIdentification issues• individual characteristics affect aspirations, aspiration windows and behaviour (e.g. schooling levels, wealth, and family background), Particularly the endogeneity of the aspiration window a key hurdle• Investment ‘cause’ aspirations (e.g. the successful investor may in turn revise his/her aspiration to a higher level), or• aspirations ‘cause’ investment – the one we aim to identify.An experimental design helpful to test the link between aspiration window, aspirations and aspirations failures. 04/19/12 18

Aspiration formation – A simple formulation entral Proposition: ((Bandura (1993, 1994) in psychology, Appadurai (2001) in sociology , Ray (2006) in economics): Aspirations reflect:  an individual’s aspiration window – peers and economic opportunities of the local environment  An individual’s own characteristics and past experience including shocks; t- 1 å é u (s ) + q u (s ) + q u (s ) + e ù 1 ait = q ê i i i ,t i ,t ú t- 1 t =1 ë w w w,t - w - w - w,t û04/19/12 19

Formation of Aspirations - An Empirical Analysis

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