Perceived Self-Efficacy, Poverty, and Economic Development

Traditionally focused on external constraints, economists are increasingly recognizing the importance of internal constraints that reflect perceptions as much as reality. Perceived self-efficacy (PSE)—individuals’ perception of their domain-specific capabilities—fundamentally shapes these internal constraints and thereby drives economic behavior. Without sufficient PSE, individuals have little reason to invest greater effort or attempt anything new. Individuals with higher PSE set more ambitious goals, try harder, and persist more diligently. Such proactive engagement in perceiving and creating possibilities is often either ignored or implicitly assumed in simple optimization models. Growing evidence from psychology and economics suggests that PSE deserves greater attention. We review the theoretical and empirical literature on PSE with a focus on its relevance to poverty and economic development. We discuss promising avenues for future research at the interface of PSE and poverty as part of the broader frontier of behavioral development economics.