The Timing of Pay
56 Pages Posted: 9 Nov 2010 Last revised: 23 Sep 2012
Date Written: July 16, 2012
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: Suggested Citation