Government Policy, Strategic Consumer Behavior, and Spillovers to Retailers: The Case of Demonetization in India

Yewon Kim (), Pradeep Chintagunta and Bhuvanesh Pareek ()
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Yewon Kim: Stanford Graduate School of Business, Stanford, California 94304
Bhuvanesh Pareek: Indian Institute of Management, Bangalore 560076, India

Marketing Science, 2022, vol. 41, issue 6, 1118-1144

Abstract: This paper studies strategic consumer shopping behavior in response to a macroeconomic policy and quantifies its unintended consequences for retailers vis-à-vis the policy goal. Using transaction-level data from a large retail chain in India, we document consumer strategies that leverage retailers to avoid costs associated with the country’s currency reform policy. We observe both an increase in returns of cash-purchased items that were bought before demonetization ( strategic returns ) and a spike in final (unreturned) cash purchases with soon-to-be-illegal notes ( strategic purchases ). Both practices serve consumer incentives either to receive legal notes from the retailer or to avoid depositing cash in formal bank accounts. Our analysis suggests that strategic consumers hindered the intended policy effect while partly benefiting the retail chain, leaving 20 million Indian rupees (INR) ($0.3 million) of demonetized notes outside the formal tax network through this retail chain only; when we scale up the estimates to the country’s market size, the estimated total impact reaches 100 billion INR ($1.5 billion). Our findings offer implications for policy makers by quantifying a wide spillover effect of government interventions that goes beyond the target group and document a new role of the retail industry: of absorbing and facilitating a response to macroshocks.

Keywords: strategic consumer behavior; unintended consequences; product returns; public policy; policy evaluation; currency reform (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormksc:v:41:y:2022:i:6:p:1118-1144

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