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Where Does it Go? Spending by the Financially Constrained

Author

Listed:
  • Shawn A. Cole

    () (Harvard Business School, Finance Unit)

  • John Thompson

    () (H&R Block)

  • Peter Tufano

    () (Harvard Business School, Finance Unit)

Abstract

In this paper, we analyze the spending decisions of over 1.5 million Americans who vary in their degree of revealed credit constraints. Specifically, we analyze how these Americans spend their income tax refunds, using transaction-level data from a stored-value card product. Card-holders may choose among several tax settlement and loan options, effectively receiving cash as much as 90 days earlier than would have been possible without a settlement product. Those selecting earlier settlement options pay higher fees and interest, therefore revealing the level of credit constraints or impatience. We find that more credit constrained or impatient individuals spend their monies more quickly. The mix of cash and merchant transactions is similar between more and less constrained groups. Finally, the primary merchant uses of refunds are to pay for necessities (grocery stores, gas stations, etc.), and the fraction of the refund spending devoted to these necessities is higher for those with greater revealed credit constraints.

Suggested Citation

  • Shawn A. Cole & John Thompson & Peter Tufano, 2008. "Where Does it Go? Spending by the Financially Constrained," Harvard Business School Working Papers 08-083, Harvard Business School, revised Apr 2008.
  • Handle: RePEc:hbs:wpaper:08-083
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    Cited by:

    1. Dubravka Ritter, 2012. "Do we still need the Equal Credit Opportunity Act?," Payment Cards Center Discussion Paper 12-03, Federal Reserve Bank of Philadelphia.
    2. Cambpbell, John Y. & Jackson, Howell Edmunds & Madrian, Brigitte & Tufano, Peter, 2010. "The Regulation of Consumer Financial Products: An Introductory Essay with Four Case Studies," Scholarly Articles 4450128, Harvard Kennedy School of Government.
    3. McGranahan, Leslie, 2016. "Tax Credits and the Debt Position of U.S. Households," Working Paper Series WP-2016-12, Federal Reserve Bank of Chicago.

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