Where Does it Go? Spending by the Financially Constrained

40 Pages Posted: 10 Mar 2008 Last revised: 16 Nov 2008

See all articles by Shawn Allen Cole

Shawn Allen Cole

Harvard Business School

John Thompson

H&R Block

Peter Tufano

University of Oxford - Said Business School; National Bureau of Economic Research (NBER); University of Oxford - Said Business School

Date Written: April 11, 2008

Abstract

In this paper, we analyze the spending decisions of over 1.5 million Americans who vary in their degree of revealed credit constraints. Specifically, we analyze how these Americans spend their income tax refunds, using transaction-level data from a stored-value card product. Card-holders may choose among several tax settlement and loan options, effectively receiving cash as much as 90 days earlier than would have been possible without a settlement product. Those selecting earlier settlement options pay higher fees and interest, therefore revealing the level of credit constraints or impatience. We find that more credit constrained or impatient individuals spend their monies more quickly. The mix of cash and merchant transactions is similar between more and less constrained groups. Finally, the primary merchant uses of refunds are to pay for necessities (grocery stores, gas stations, etc.), and the fraction of the refund spending devoted to these necessities is higher for those with greater revealed credit constraints.

Suggested Citation

Cole, Shawn Allen and Thompson, John and Tufano, Peter, Where Does it Go? Spending by the Financially Constrained (April 11, 2008). Harvard Business School Finance Working Paper No. 08-083. Available at SSRN: https://ssrn.com/abstract=1104673 or http://dx.doi.org/10.2139/ssrn.1104673

Shawn Allen Cole (Contact Author)

Harvard Business School ( email )

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John Thompson

H&R Block ( email )

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Kansas City, MO 64105
United States

Peter Tufano

University of Oxford - Said Business School ( email )

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Oxford, OX1 1HP
Great Britain
+44 (0) 1865 288551 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain
+44 (0) 1865 288551 (Phone)

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