Frugality Is Hard to Afford

Ross School of Business Paper No. 1309

Kilts Center for Marketing at Chicago Booth – Nielsen Dataset Paper Series 2-031

41 Pages Posted: 7 Mar 2016 Last revised: 28 Apr 2018

See all articles by A. Yesim Orhun

A. Yesim Orhun

University of Michigan, Stephen M. Ross School of Business

Mike Palazzolo

University of California, Davis - Graduate School of Management

Date Written: April 20, 2018

Abstract

Households commonly utilize strategies that provide long-term savings on everyday purchases in exchange for an increase in their short-term expenditures. For example, they buy larger packages of non-perishable goods to take advantage of bulk discounts, and accelerate their purchases to take advantage of temporary discounts. However, use of such strategies requires that households have the liquidity necessary to increase their short-term spending. Using the Nielsen consumer panel dataset, this paper provides causal evidence that liquidity constraints inhibit low-income households’ ability to use such strategies, above and beyond the impact of other constraints, revealing a previously undocumented dimension of the poverty penalty. Our findings suggest that low-income households will be less responsive to promotions that require intertemporal substitution than their higher-income counterparts, and that they will be more responsive during times of higher liquidity (e.g., shortly after receiving paychecks) than during times of lower liquidity. We discuss marketing and policy implications of this result.

Keywords: intertemporal substitution, poverty, liquidity constraints, bulk discounts, purchase acceleration

Suggested Citation

Orhun, A. Yesim and Palazzolo, Mike, Frugality Is Hard to Afford (April 20, 2018). Ross School of Business Paper No. 1309; Kilts Center for Marketing at Chicago Booth – Nielsen Dataset Paper Series 2-031. Available at SSRN: https://ssrn.com/abstract=2742431 or http://dx.doi.org/10.2139/ssrn.2742431

A. Yesim Orhun (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Mike Palazzolo

University of California, Davis - Graduate School of Management ( email )

540 Alumni Ln
Davis, CA 95616
United States

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