The Timing of Pay

56 Pages Posted: 9 Nov 2010 Last revised: 23 Sep 2012

Christopher A. Parsons

University of California, San Diego (UCSD) - Rady School of Management

Edward Dickersin Van Wesep

University of Colorado at Boulder - Department of Finance

Date Written: July 16, 2012

Abstract

There exists large and persistent variation in not only how, but when employees are paid, a fact largely unexplored by theory. This paper develops a theory of optimal pay timing when workers make time-inconsistent savings and borrowing decisions. The model justifies the existence of a wide range of mechanisms intended to alter when pay is delivered - e.g., pay frequency, bonuses, lumpiness, etc. We also characterize the welfare implications of payday lending, or similar instruments that allow workers to undue the firm's desired pay timing profile. Consistent with recent debate, we show that the welfare impact of payday lending is ambiguous, and depends crucially on paycheck frequency. Our analysis thus suggests that legislation of consumer and worker protection laws should be considered in tandem.

Keywords: Compensation, Hyperbolic Discounting, Welfare, Payday Lending

JEL Classification: H53, I38, J31, J33

Suggested Citation

Parsons, Christopher A. and Van Wesep, Edward Dickersin, The Timing of Pay (July 16, 2012). Available at SSRN: https://ssrn.com/abstract=1706206 or http://dx.doi.org/10.2139/ssrn.1706206

Christopher A. Parsons

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Mail Code 0502
La Jolla, CA 92093-0112
United States

Edward Dickersin Van Wesep (Contact Author)

University of Colorado at Boulder - Department of Finance ( email )

Campus Box 419
Boulder, CO 80309
United States

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