Managing Mental Accounts: Payment Cards and Consumption Expenditures

Abstract

Does mental accounting matter for total consumption expenditures? We exploit a unique setting in which individuals exogenously received a new credit card, without requesting one. Using random variation in the time of receipt we show that individuals temporarily increase total consumption expenditure by making purchases with the new card without reducing spending on the others. We do not observe a corresponding increase in indebtedness. Total consumption expenditure rises even for the least liquidity-constrained individuals. The evidence is consistent with consumers treating methods of payment as nonfungible budget categories, as suggested by the mental accounting heuristic.

Keywords: Mental Accounting, Budget Categories, Consumption, Credit Cards

JEL Classification: D12, D14, E21, G41, G51