Government policy, strategic consumer behavior, and spillovers to retailers: The case of demonetization in India
70 Pages Posted: 29 Mar 2021 Last revised: 24 Nov 2021
Date Written: November 23, 2021
This paper studies strategic consumer shopping behavior in response to a macroeconomic policy in the case of currency reform, and quantifies its unintended consequences for retailers vis-a-vis the policy goal. Using transaction-level data from a large retail chain in India, we document consumer strategies that leverage the presence of retailers to avoid costs associated with the country's currency reform policy. We observe both an increase in returns of cash-purchased items that were bought before demonetization (strategic returns) and a spike in final (unreturned) cash purchases with soon-to-be-illegal notes (strategic purchases). Both practices serve consumer incentives either to receive legal notes from the retailer or to avoid depositing cash in formal bank accounts. Our analysis suggests that strategic consumers hindered the intended policy effect while partly benefiting the retail chain, leaving more than 20 million INR (0.3 million USD) of demonetized notes outside the formal tax network through this retail chain only; when we scale up the estimates to the country's market size, the estimated total impact is at least 100 billion INR (1.5 billion USD). Our findings (i) offer implications for policy makers by quantifying a wide spillover effect of government interventions that goes beyond the target group, and (ii) document a new role of the retail industry - of absorbing, and facilitating a response to, macro shocks.
Keywords: Strategic Consumer Behavior, Unintended Consequences, Product Returns, Currency Reform
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