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Can positive income anticipations reverse the mental health impacts of negative income anxieties?

TitleCan positive income anticipations reverse the mental health impacts of negative income anxieties?
Year of Publication2019
AuthorsWatson, B., and Osberg L.
JournalEconomics and Human Biology
Pages107 - 122
Keywordseconomic insecurity, loss aversion, mental health, panel data, prospect theory

Highlights * Prospect theory posits that losses are more impactful to mental health than gains. * We examine this conjecture based on the anticipation of a large income shock. * The identification strategy employs both fixed effects and instrumental variables. * Findings: psychological distress is more affected by the threat of a negative shock. * Additionally, the probability of a shock is subject to diminishing marginal impacts. Abstract: Prospect theory suggests losses are more influential than equivalent sized gains in individual level decision-making. Extending this literature, we use longitudinal National Population Health Survey data (2000-01 to 2010-11) to investigate whether experienced psychological distress impacts of greater economic insecurity for working age Canadians can be fully reversed by equal sized increases in security. Economic insecurity (security) is defined as the probability of an annual income decrease (increase) of 25 percent or more. Our identification strategy employs fixed effects estimation and a set of instruments to control for unobserved heterogeneity and reverse causality. Results suggest that an initial one standard deviation increase in economic insecurity predicts a rise in psychological distress of about 0.57 standard deviations for males and 0.54 standard deviations for females. Good economic news of a similar magnitude has considerably less impact, reducing psychological distress by 0.16 and 0.35 standard deviations for males and females respectively.