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

David Huffman and Matias Barenstein
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Matias Barenstein: affiliation not available

No 1430, IZA Discussion Papers from Institute of Labor Economics (IZA)

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.

Keywords: consumption; hyperbolic-discounting; mental accounting; payday; reference-dependent preferences; credit cards (search for similar items in EconPapers)
JEL-codes: B49 D11 D12 J33 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2004-12
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Citations: View citations in EconPapers (9)

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