Frugality is Hard to Afford

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

Ross School of Business Paper No. 1309

Posted: 7 Mar 2016 Last revised: 12 Apr 2017

A. Yesim Orhun

University of Michigan, Stephen M. Ross School of Business

Mike Palazzolo

University of California, Davis - Graduate School of Management

Date Written: March 20, 2016

Abstract

Households commonly utilize strategies that provide long-term savings for everyday purchases in exchange for an increase in their short-term expenditures. They buy larger packages of non-perishable goods to take advantage of bulk discounts, and accelerate their purchases to take advantage of temporary discounts. We document that low income households are less likely to utilize these strategies even though they have greater incentives to do so. Moreover, results suggest a compounding effect: the inability to buy in bulk inhibits the ability to time purchases to take advantage of sales, and the inability to accelerate purchase timing to buy on sale inhibits the ability to buy in bulk. We find that the financial losses low income households incur due to underutilization of these strategies can be as large as half of the savings they accrue by purchasing cheaper brands. We provide causal evidence that liquidity constraints inhibit the use of these money-saving strategies.

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

Suggested Citation

Orhun, A. Yesim and Palazzolo, Mike, Frugality is Hard to Afford (March 20, 2016). Kilts Center for Marketing at Chicago Booth – Nielsen Dataset Paper Series 2-031; Ross School of Business Paper No. 1309. 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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