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

Listed author(s):
  • Huffman, David B.

    ()

    (University of Pittsburgh)

  • Barenstein, Matias

    (affiliation not available)

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
Handle: RePEc:iza:izadps:dp1430
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