Coming in at a Trickle: The Optimal Frequency of Public Benefit Payments

Abstract

How governments should choose the frequency of payments has received little attention in the literature on the optimal design of benefits programs. We propose a simple model in which the government chooses the interval length between payments, subject to a tradeoff between administrative costs of providing more frequent benefits and welfare gains from mitigating recipients’ consumption non-smoothing. Using a high-frequency retail dataset that links consumers to their purchase history, we apply the model to the Japanese National Pension System. Our evidence suggests suboptimal intra-cycle consumption patterns, with negligible retailer price discrimination. Our model calibrations support the worldwide prevalence of monthly payment schedules, even under extreme assumptions about preferences, and regardless of consumers’ underlying behavioral frictions. For governments facing rapidly aging populations, our results imply lowering pension payment frequency may be a budget-preserving alternative to raising retirement age thresholds.

Keywords: optimal payment frequency, splurge goods, consumption smoothing, mental accounting, present bias, incidence, retail scanner data, pension reform

JEL Classification: D12, D91, G51, H21, H55, I38