Scarcity: Why Having Too Little Means So Much

by Sendhil Mullainathan

Escaping the scarcity trap does not merely require an occasional act of vigilance. It requires constant, everlasting vigilance; almost all temptations must be resisted almost all the time. Now, might not willpower build up with practice? Might not the poor, having to exercise it constantly, develop stronger willpower? There is little evidence to show that willpower capacity increases with use. (Think of how ironic this would be relative to common belief: the poor having greater willpower!)

Recent research shows that self-control may actually get depleted as we use it.

Researchers in this field have likened willpower to a muscle, which fatigues with use. By this account, a persistent need to resist temptation would deplete, making it all the more difficult to escape the scarcity trap.

Scarcity traps are particularly poignant because there is a feeling that with just one infusion, having just once gotten rid of all debt, a person can break free of the cycle.

In all these cases, a one-time infusion of resources would appear to solve the problem.

To see what happens, we decided to give the vendors at Koyambedu the cash they needed. Working with

the economist Dean Karlan, we ran a study with hundreds of vendors. Half of them we simply followed for a year, recording their finances. We gave the other half a way out of the trap: we bought out all their debt. Overnight, we converted them from bo...

But that was not the full story. In the ensuing months they fell back, bit by bit. Or, rather, we should say one by one. By the end of the year, they all had accumulated as much debt as those whose debt we had left alone.

How are we to explain this behavior? Why do the vendors eventually fall back? What is it about the scarcity trap that operates so dramatically to alter their lives again, even after they have been given enough money to double their incomes?

The core of the problem is a lack of slack. Even after our cash infusion, the vendor is still living on less than two dollars a day. After all, her income must feed more than just herself. When packed so tightly, suppose she hits a bump in the road—a relative’s wedding comes up and she has to buy a gift.

Now picture the vendor in a savings cycle, after we’ve absolved her of the debt. When she faces the sudden need to buy a gift, she also tunnels. She must address this pressing need. And for her there’s an “easy” solution at hand: she has cash sitting around. Of course, it is for emergency needs only, but this is one. She can borrow her working capital and use the available cash to handle the wedding gift. How will she exit another debt cycle? What are the costs? By now we know the answer to those questions: “I can’t worry about that now.” Those concerns fall strictly outside the tunnel.

In this view, the vendor falls back into the scarcity trap because she did not have enough slack in her budget to weather the shocks she faces. Shocks bigger than her slack push her right back into the

psychology of scarcity. And once there, one of the first cas...

Imagine we give someone who is very busy and perpetually behind a gift of time: overdue obligations disappeared, all outstanding time commitments resolved. This formerly overwhelmed but now just very busy person might stay ahead for a while. But eventually she, too, will likely slip up: an unexpected glitch on a large project, a medical setback at home, just plain lethargy and a momentary loss in productivity—and she suddenly finds herself behind again. Any slight instability is a threat hovering over a life lived at the edge of a scarcity trap, because with little slack to absorb it, instability is almost certain to be felt.

What matters most is the slack available to weather each new shock. This is why instability can have such an impact. Without enough slack, where do you get the money to fix your car when it breaks down?

But when you lack savings or a second car, and have no dinners to cancel, this becomes a serious challenge: where will you get the money? At that moment, you tunnel. You borrow. You start on a path back into a scarcity trap.

Scarcity is not merely the gap between resources and desires on average. Even if, as in the case of the vendor, there are many days with slack, it is the days of scarcity that matter.

It says that periods of scarcity can elicit behaviors that end up pulling us into a scarcity trap. And with scarcity traps, what would otherwise be periods of abundance punctuated by moments of scarcity can quickly become perpetual scarcity.

Rather, this discussion highlights the need for instruments for buffering against shocks.

We can blame the vendor’s relapse into a scarcity trap on the shocks that befell her, but we can also look to the lack of a buffer.

The seeds of the scarcity trap were sown during a period of at least relative abundance. And the same dynamic appears to happen with time as well.

Like the vendor’s scarcity, your scarcity originates with mistakes made during periods of relative abundance. During periods of abundance, we waste time or money.

They were poor right before this harvest only because they had mismanaged their finances when they were still flush. This is different from the problem of borrowing while poor. This is about waste when money is abundant. The result is an avoidable cycle punctuated by recurring periods of abundance followed by threatened periods of scarcity.