NOVAFRICA Webinar: “Psychological and Material Determinants of Economic Investments and Outcomes in Rural Kenya”

On Wednesday, July 1st, at 02.30 pm, the NOVAFRICA Center welcomes Kate Orkin from the University of Oxford, to present her work on the psychological and material determinants of economic investments and outcomes in rural Kenya.

Author:
Kate Orkin, University of Oxford

Abstract:

Households in developing countries sometimes do not make investments that appear to have high economic returns. This may reflect conventional economic constraints, such as limited access to credit, and/or psychological constraints, such as low aspirations or beliefs in one’s ability to alter outcomes. We explore the roles of economic and psychological constraints to investment and economic well-being using a 415-village trial in Western Kenya. We cross-randomise a large unconditional cash transfer with a `psychological’ intervention: a video documentary of successful people in similar villages who escaped poverty. First, both interventions increase self-beliefs and aspirations.This suggests that these constructs depend partly on economic circumstances,which the cash transfer improves. Second, adding the psychological intervention to cash does not change overall consumption expenditure, but shifts spending toward education from food and non-durables, suggesting psychological constraints may limit long-run investments even without resource constraints. Third, both interventions shift input expenditure and labour supply toward livestock and non-farm enterprises, and increase non-farm enterprise revenue. This mimics the portfolio of wealthier households at baseline. But only cash increases value-added per worker. This suggests psychological constraints on investment, particularly in non-farm enterprise, but also resource/credit constraints on higher value-added activities, which are alleviated only by cash. Combining interventions has similar effects on economic activity to cash. These patterns are consistent with a model where agents choose consumption, investment, and labour supply to maximise lifetime utility with an aspirations-dependent reference point; the reference point depends on both self-beliefs and economic position; and there are multiple types of investment goods with heterogeneous production technology and returns.

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