Scarcity: Why Having Too Little Means So Much

by Sendhil Mullainathan

SHOCKS 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. In a place like India, social custom dictates buying a big-enough gift, so how this bump is managed partly depends on whether the vendor is in a debt cycle or a savings cycle. In a debt cycle, the vendor faces a difficult challenge. She must make trade-offs: what to give up to buy the gift? Or perhaps she’ll simply buy a smaller gift. She tunnels, but credit is not much of an option; she is already using the moneylender to buy fruits and vegetables. She weathers the storm by sacrificing what little she can. She may feel the pain of what she has to sacrifice to buy the gift and may feel ashamed at the meager gift she is able to afford. 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?