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The timing of pay

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  • Parsons, Christopher A.
  • Van Wesep, Edward D.

Abstract

There exists large and persistent variation in not only how, but when employees are paid, a fact unexplained by existing theory. This paper develops a simple model of optimal pay timing for firms. When workers have self-control problems, they under-save and experience volatile consumption between paychecks. Thus, pay whose delivery matches the timing of workers' consumption needs will reduce wage costs. The model also explains why pay timing should be regulated (as it is in practice): although the worker benefits from a timing profile that smoothes her consumption, her lack of self-control induces her to attempt to undo the arrangement, either by renegotiating with her employer or by taking out payday loans. Regulation of pay timing and consumer borrowing is required to counter these efforts, helping the worker help herself.

Suggested Citation

  • Parsons, Christopher A. & Van Wesep, Edward D., 2013. "The timing of pay," Journal of Financial Economics, Elsevier, vol. 109(2), pages 373-397.
  • Handle: RePEc:eee:jfinec:v:109:y:2013:i:2:p:373-397
    DOI: 10.1016/j.jfineco.2013.03.005
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    References listed on IDEAS

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    Cited by:

    1. Deborah Cobb-Clark, 2015. "Locus of control and the labor market," IZA Journal of Labor Economics, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 4(1), pages 1-19, December.
    2. Heywood, John S. & Jirjahn, Uwe & Struewing, Cornelia, 2017. "Locus of control and performance appraisal," Journal of Economic Behavior & Organization, Elsevier, vol. 142(C), pages 205-225.
    3. Can Cui, 2017. "Cash-on-hand and demand for credit," Empirical Economics, Springer, vol. 52(3), pages 1007-1039, May.
    4. Arna Vardardottir & Michaela Pagel, 2016. "The Liquid Hand-to-Mouth: Evidence from a Personal Finance Management Software," 2016 Meeting Papers 789, Society for Economic Dynamics.
    5. Lu, Shih En, 2016. "Self-control and bargaining," Journal of Economic Theory, Elsevier, vol. 165(C), pages 390-413.

    More about this item

    Keywords

    Payday lending; Hyperbolic discounting; Self-control problems; Pay frequency; Payday loan legislation; Paycheck frequency; Time inconsistency;

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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