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Income Timing, Savings Constraints, and Temptation Spending: Evidence from a Randomized Field Experiment

43 Pages Posted: 21 Nov 2016 Last revised: 30 Nov 2016

Lasse Brune

Yale University - Economic Growth Center

Jason Theodore Kerwin

University of Minnesota - Twin Cities - Department of Applied Economics

Date Written: November 29, 2016

Abstract

We study a savings technology that is popular but underutilized in developing countries: short-term deferred compensation, in which workers receive a single, later lump sum instead of more frequent installments. Workers who are randomly assigned to lump-sum payments reduce the share of income they spend immediately by 25%, and increase short-term cash holdings by a third. They are 5 percentage points more likely to purchase an artificial "bond" offered through the study. These effects are most likely due to savings constraints: 72% of workers prefer deferred payments, and rationalizing workers' choices without savings constraints requires implausibly low discount factors. Although workers report that temptation spending is an important driver of savings constraints, we find little evidence for that mechanism. Employers could enhance workers' welfare at limited cost by offering deferred wage payments.

Keywords: Savings Constraints, Financial Inclusion, Time Preference, Discounting, Labor Economics, Development Economics

JEL Classification: D14, J33, O12, O16

Suggested Citation

Brune, Lasse and Kerwin, Jason Theodore, Income Timing, Savings Constraints, and Temptation Spending: Evidence from a Randomized Field Experiment (November 29, 2016). Available at SSRN: https://ssrn.com/abstract=2872492 or http://dx.doi.org/10.2139/ssrn.2872492

Lasse Brune

Yale University - Economic Growth Center ( email )

Box 208269
New Haven, CT 06520-8269
United States

Jason Theodore Kerwin (Contact Author)

University of Minnesota - Twin Cities - Department of Applied Economics ( email )

MN
United States

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