On Payday, Consumers Feel A License To Spend

NEW YORK, March 25, 2016 /PRNewswire/ -- If the line at Starbucks seems extra long on certain days of the month, it could mean that people share more than a collective craving for caramel macchiatos. They might also have the same payday.

According to new research from Michaela Pagel, an assistant professor at Columbia Business School, and Arna Vardardottir of Copenhagen Business School, individuals across the income spectrum spend more on discretionary goods — things like clothes, entertainment, and fast-food meals — on days they get paid.

And we're not just talking ventis instead of grandes. By studying electronic payments made by consumers, the researchers found that more than half of the population increases their spending on paydays by over 25 percent, even after controlling for individual, day of the week, and day of the month fixed effects, which capture things like after work drinks with colleagues and increased spending around holidays. Individuals are more likely to go shopping and, once they're out, to spend more than they normally would — a double whammy for the pocketbook.

"According to standard economic theory, people make financial plans and budgets, but our research shows that people don't behave consistent with theory, especially on the day they receive their paycheck," explains Pagel.

Historically, economists have attributed such payday spending responses to a lack of cash on hand, due either to a lack of savings, as among the working poor, or to wealth being tied up in houses, cars, and investments, as among the more affluent.

However, the research authors say it may be a psychological response that causes people to spend on payday. Despite the income being totally expected, the influx gives consumers a momentary feeling of being flush with cash, leading them to splurge on more, and pricier, goods.

"Payday spending is a completely understandable behavior from a common-sense standpoint, but it doesn't make sense according to the economic models, which says people optimize their budgets across time," says Pagel. "So theoretically, you shouldn't see people consuming more just because they have more money one day – yet it happens."

The findings are based on studying five years of purchasing data (2011-2015) from Iceland — where nearly all payments are made electronically, making them easily traceable through the popular software application Meniga, which links all of an individual's banking and credit card accounts to provide a simple overview of income and spending.

To learn more about cutting-edge research being performed by Columbia Business School faculty members, please visit www.gsb.columbia.edu. 

About Columbia Business School
Columbia Business School is the only world-class, Ivy League business school that delivers a learning experience where academic excellence meets with real-time exposure to the pulse of global business. Led by Dean Glenn Hubbard, the School's transformative curriculum bridges academic theory with unparalleled exposure to real-world business practice, equipping students with an entrepreneurial mindset that allows them to recognize, capture, and create opportunity in any business environment. The thought leadership of the School's faculty and staff, combined with the accomplishments of its distinguished alumni and position in the center of global business, means that the School's efforts have an immediate, measurable impact on the forces shaping business every day. To learn more about Columbia Business School's position at the very center of business, please visit www.gsb.columbia.edu.

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