The culture-of-poverty view proposes that the poor’s norms, values, and attitudes deviate from others and shape their preferences and behaviors (Lewis 1998). One view suggests that these behaviors mirror the poor’s preferences and should be seen as rational adaptations to their economic circumstances. The debate about these behaviors of the poor reflects several views. 2010) and while they are eligible for welfare programs, take-up rates are low (Bertrand et al. Additionally, low-income individuals are more likely to cut back their non-emergency healthcare services (Lusardi et al. Low-income households tend to save too little (Shurtleff 2009), to borrow repeatedly at high-interest rates (Banerjee and Duflo 2007 Skiba and Tobacman 2008), and to spend relatively large parts of money on tobacco, alcohol, and lotteries (Banerjee and Duflo 2007 Blalock et al. Poverty is associated with seemingly irrational and counterproductive behaviors in several areas of economic life, both in developed and developing countries. We conclude that both theoretical and empirical work are needed to build a stronger theory. Although the theory provides an original, coherent, and parsimonious explanation for the relationship between financial scarcity and economic decision making, the theory does not fully accord with the data and lacks some precision.

Additionally, we evaluated the overall status of scarcity theory. Evidence for the third proposition was not conclusive. Our findings indicate that the current literature predominantly confirms the first and second proposition, although methodological issues prevent a firm conclusion. To this end, we reviewed the empirical evidence for three fundamental propositions: (1) Poverty leads to attentional focus and neglect causing overborrowing, (2) poverty induces trade-off thinking resulting in more consistent consumption decisions, and (3) poverty reduces mental bandwidth and subsequently increases time discounting and risk aversion.

The purpose of our work is to provide an integrated, up-to-date, critical review of this theory. Scarcity theory proposes that poverty itself induces a scarcity mindset, which subsequently forces the poor into suboptimal decisions and behaviors. Poverty is associated with a wide range of counterproductive economic behaviors.

Scarcity principle definition