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

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Author Info
Huffman, David () (IZA Bonn)
Barenstein, Matias (Federal Trade Commission)

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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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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
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Handle: RePEc:iza:izadps:dp1430

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

Other versions of this item:

Find related papers by JEL classification:
B49 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Other
D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Emre Ozdenoren & Stephen Salant & Dan Silverman, 2006. "Willpower and Optimal Control of Visceral Urges," Levine's Working Paper Archive 122247000000001355, David K. Levine. [Downloadable!]
  2. Emre Ozdenoren & Stephen Salant & Dan Silverman, 2006. "Willpower and the Optimal Control of Visceral Urges," Economics Working Papers 0069, Institute for Advanced Study, School of Social Science. [Downloadable!]
    Other versions:
  3. David A. Reinstein, 2006. "Does One Contribution Come at the Expense of Another? Empirical Evidence on Substitution Between Charitable Donations," Economics Discussion Papers 618, University of Essex, Department of Economics. [Downloadable!]
  4. 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 2007-4, Federal Reserve Bank of Boston. [Downloadable!]
  5. King, Robert P. & Damon, Amy L. & Leibtag, Ephraim, 2006. "Household Food Expenditures across Income Groups: Do Poor Households Spend Differently than Rich Ones?," 2006 Annual meeting, July 23-26, Long Beach, CA 21470, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
    Other versions:
  6. Ricardo N. Bebczuk, 2008. "Financial Inclusion in Latin America and the Caribbean: Review and Lessons," Working Papers 0068, CEDLAS, Universidad Nacional de La Plata. [Downloadable!]
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