Association for Public Policy Analysis & Management

Recent research links poverty to deficits in cognitive functioning. The poor are often burdened with chronic debts, which further impose cognitive ‘bandwidth taxes’, contributes to psychological distress, and increases risk aversion. However, there is surprisingly little evidence on whether measures of cognitive and psychological functioning are functionally related to objective material indicators of welfare of those in poverty. Without better evidence, it is not clear that policy interventions which seek to relieve those in poverty of the ‘bandwidth tax’ on cognitive functioning will realistically lead to permanent improvements in outcomes such as employment, incomes, and personal financial management.

We provide evidence on this question by studying the effect of a charitable program which cancelled up to $5,000 Singapore Dollars of debt for highly indebted, low-income households. The magnitude of debt relief is substantial and worth about half a year’s income for the households in the program. We conducted a comprehensive household financial survey that included measures of cognitive functioning, risk-taking, and psychosocial functioning, surveying participants immediately before and after debt relief, and following up one year after debt relief. We find that debt relief causes immediate improvements in cognitive functioning and a reduction in symptoms of generalized anxiety disorder, while risk tolerance increases immediately after debt relief. One year after debt relief, we find that while the reduction in anxiety is associated with a persistent improvement in personal finances, there is no such improvement in personal finances associated with the debt relief-induced improvements in cognitive functioning. Nor is there substantial evidence that employability and income is affected by debt-relief induced improvements in cognitive ability.

Taken together, the evidence suggests caution in interpreting research on the ‘bandwidth tax’ of poverty. While reducing cognitive bandwidth taxes through debt relief leads to immediate cognitive gains, our evidence shows these improvements in cognitive functioning do not translate to persistent improvements in material well-being. Research needs to turn to understanding the mechanisms through which cognitive and behavioural traits actually affect material outcomes, and why.