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

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  • Huffman, David B.

    () (University of Pittsburgh)

  • 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.

Suggested Citation

  • Huffman, David B. & Barenstein, Matias, 2004. "Riches to Rags Every Month? The Fall in Consumption Expenditures Between Paydays," IZA Discussion Papers 1430, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp1430
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    References listed on IDEAS

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    Cited by:

    1. Emre Ozdenoren & Stephen W. Salant & Dan Silverman, 2012. "Willpower And The Optimal Control Of Visceral Urges," Journal of the European Economic Association, European Economic Association, vol. 10(2), pages 342-368, April.
    2. King, Robert P. & Damon, Amy L. & Leibtag, Ephraim S., 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).
    3. Damon, Amy L. & King, Robert P. & Leibtag, Ephraim, 2013. "First of the month effect: Does it apply across food retail channels?," Food Policy, Elsevier, vol. 41(C), pages 18-27.
    4. Ricardo N. Bebczuk, 2008. "Financial Inclusion in Latin America and the Caribbean: Review and Lessons," CEDLAS, Working Papers 0068, CEDLAS, Universidad Nacional de La Plata.
    5. 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.

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    More about this item

    Keywords

    reference-dependent preferences; mental accounting; payday; hyperbolic-discounting; consumption; credit cards;
    All these keywords.

    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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