Limited Attention and Income Distribution

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Limited Attention and Income Distribution

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Title: Limited Attention and Income Distribution
Author: Banerjee, Abhijit V.; Mullainathan, Sendhil

Note: Order does not necessarily reflect citation order of authors.

Citation: Banerjee, Abhijit V. and Sendhil Mullainathan. 2008. Limited attention and income distribution. American Economic Review 98, no. 2: 489-493.
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Abstract: Economists have long been interested in the idea that there is a direct circular relation between poverty and low productivity, and not just one that is mediated by market failures, usually in asset markets. The nutrition-based efficiency wage model (Partha Dasgupta and
Debraj Ray, 1987) is the canonical example of models where this happens: However it
has been variously suggested (see for example T. N. Srinivasan, 1994) that the link from nutrition to productivity and especially the link from productivity to nutrition is too weak to be any more than a small part of the story. Partha Dasgupta himself acknowledges this when he writes "nutrition-productivity construct provides a metaphor,..., for ... an economic
environment harboring poverty traps" (Partha Dasgupta, 1997, page 5). We propose an alternative approach to this question based on the idea that attention
is a scarce resource that is important for productivity. Specifically, people may not be able to fully attend to their jobs if they are also worrying about problems at home and being distracted in this way reduces productivity. But not paying attention at home is also costly: early symptoms of a child's sickness may go unnoticed; water may run out at the
end of the day; kerosene for lighting lamps at home might run out and make it hard to do homework; etc. Finally, the extent to which home life distracts depends on the nature of home life. Specifically, certain goods (e.g. a good baby sitter, a 24-hour piped water supply,
a connection to a power supply grid) can reduce the extent of home life distraction. These three assumptions generate an interesting relation between income and productivity that is at the core of our model. The non-poor in this model, by virtue of owning distraction-saving goods and services at home, are able to focus more on their work. Hence
they will be more productive at work and will be able to afford more distraction-saving goods. This simple two-way relationship between income and productivity produces a discontinuity in the relation between human capital and earnings which is certain cases can lead to a poverty trap, even in the absence of any market failures.
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