How do poor people define poverty?

A fascinating new paper by Ben Olken and Abhijit Banerjee uses a field experiment to look into the difference between “objective” consumption-based measures of poverty and what Indonesian villagers define as being poor. They find that a community ranking exercise basically does at least as well as an objective alternative in estimating consumption (until people get tired of the exercise), but that villagers value other non-consumption factors in determining who is poor.

Independent of consumption, poorer households are deemed to:

• Be smaller (reflecting a view that there are household economies of scale)
• Have more children
• Not be elite-connected
• Not be connected to the financial system
• Not have family outside the village (who might be able to send remittances)

the community seems to have a widely shared objective function that the government does not necessarily share, and implementing this objective is a source of widespread satisfaction in the community. Moreover, what makes this objective function different is neither nepotism (elite capture) nor majoritarian prejudices. Rather, these preferences appear to be informed by a better understanding of factors that affect the earning potential or vulnerability of the household, such as the returns to scale within the family, incentives, and insurance, as compared to relying purely on consumption as the government does.

Targeting the Poor: Evidence from a Field Experiment in Indonesia, Vivi Alatas, Abhijit Banerjee, Rema Hanna, Ben Olken, and Julia Tobias. May 2010.