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Riches to Rags Every Month? The Fall in Consumption Expenditures Between Paydays

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Author Info

  • Huffman, David B.

    ()
    (University of Oxford)

  • Barenstein, Matias

    (affiliation not available)

Abstract

This paper finds declining consumption expenditure between paydays, for a typical household in the working population of the UK. The magnitude is inconsistent with exponential time preference, but compatible with quasi-hyperbolic discounting. However, the hyperbolic model predicts that credit constraints drive the decline, and we find only mixed evidence in this regard. We also observe a method-of-payment result that suggests a role for mental accounting: households choose declining cash spending but flat credit-card spending over the pay period. We propose an alternative explanation for the results, based on cognitive costs of budgeting and perceptual biases, rather than self-control problems.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1430.

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Length: 54 pages
Date of creation: Dec 2004
Date of revision:
Handle: RePEc:iza:izadps:dp1430

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Keywords: reference-dependent preferences; mental accounting; payday; hyperbolic-discounting; consumption; credit cards;

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References

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Cited by:
  1. Damon, Amy L. & King, Robert P. & Leibtag, Ephraim S., 2006. "Household Food Expenditures Across Income Groups: Do Poor Households Spend Differently than Rich Ones?," Conference Papers, University of Minnesota, Center for International Food and Agricultural Policy 6643, University of Minnesota, Center for International Food and Agricultural Policy.
  2. Ozdenoren, Emre & Salant, Stephen & Silverman, Dan, 2010. "Willpower and the Optimal Control of Visceral Urges," Discussion Papers, Resources For the Future dp-10-35, Resources For the Future.
  3. Marques Benton & Stephan Meier & Charles Sprenger, 2007. "Overborrowing and undersaving: lessons and policy implications from research in behavioral economics," Public and Community Affairs Discussion Papers, Federal Reserve Bank of Boston 2007-4, Federal Reserve Bank of Boston.
  4. Damon, Amy L. & King, Robert P. & Leibtag, Ephraim, 2013. "First of the month effect: Does it apply across food retail channels?," Food Policy, Elsevier, Elsevier, vol. 41(C), pages 18-27.
  5. Ricardo N. Bebczuk, 2008. "Financial Inclusion in Latin America and the Caribbean: Review and Lessons," CEDLAS, Working Papers, CEDLAS, Universidad Nacional de La Plata 0068, CEDLAS, Universidad Nacional de La Plata.
  6. Emre Ozdenoren & Stephen Salant & Dan Silverman, 2006. "Willpower and Optimal Control of Visceral Urges," Levine's Working Paper Archive 122247000000001355, David K. Levine.

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