Present bias, mental budget constraint, and the payday consumption cycle

Yonghao Xu, Juanjuan Meng, Yu Zhang and Jeffrey Koo

China Economic Review, 2025, vol. 89, issue C

Abstract: This study investigates the phenomenon of household consumption rising and then dropping after payday, even in the absence of liquidity constraints. Utilizing data from a large bank, we document two findings that jointly provide a rationale for such payday consumption cycle. First, we find that consumption surges around payday only among groups exhibiting strong present bias. Second, we identify the presence of mental budget constraints, where a plausibly exogenous payday surge in consumption predicts a decrease in consumption three and four weeks later, even in the absence of liquidity constraints. These findings suggest that present bias together with mental budget constraints provide an explanation for the payday consumption cycle.

Keywords: Mental accounting; Consumption; Self-control; Present bias (search for similar items in EconPapers)
JEL-codes: D11 D12 E21 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:chieco:v:89:y:2025:i:c:s1043951x24001950

DOI: 10.1016/j.chieco.2024.102306

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