Why does poverty increase time discounting? A mathematical model

Abstract

People in situations of poverty tend to heavily discount the future. Despite repeated and robust evidence, the theoretical literature lacks satisfying models to explain why. Although urgent needs are often invoked to explain impatience, this intuition can be misleading: in persistent poverty, one may need resources tomorrow as much as today. We show that previous models assume that poverty is temporary and improvement is expected, and predict discounting only under this condition. To address this gap, we propose a two-period model in which basic needs are captured by a 'desperation threshold' -- a critical resource level above which agents aim to stay. In four stylized scenarios, we show analytically that agents discount the future near the threshold and are patient at intermediate resource levels. In line with the empirical record, time discounting increases on both sides of the threshold, while risk taking is polarized -- higher below the threshold, lower above. Unlike existing accounts, our explanation does not rely on assuming a future improvement in financial situation. Rather, it predicts a U-shaped effect of future expectations, with greater time discounting if the future will be either much better or much worse than the present. This can reconcile economic theory with ethnographic findings about deprived populations. Our findings suggest that addressing material scarcity directly, rather than attempting to alter future orientation, may be the most effective way to reduce impulsivity and align behavior with true preferences