Economics - General

Temptation Goods

Your annual salary clearly affects how much you spend on different goods and services.  However, does the frequency with which you are paid affect the composition of goods you purchase?  For instance, do individuals paid on a weekly basis differ than those paid on a monthly basis? If people are perfectly rational–ignoring any small differences due to interest rates or discount rates–one would believe that individuals paid weekly would behave the same as those paid monthly.

A paper by White and Basu (2016), however, finds that payment frequency does affect the composition of goods purchased.

We exploit a change in the payment schedule of Peru’s conditional cash transfer program to identify the impact of benefit receipt frequency on the purchase of temptation goods…Using a difference-in-differences estimation approach, we find that larger, less frequent payments increased the expenditure share of alcohol by 55–80% and sweets by 10–40%, although the absolute magnitudes of these effects are small. Our study suggests that less frequent benefits scheduling may lead cash recipients to make certain types of temptation purchases.

If you win the lottery, although financial advisors would recommend that you take the lump sum, regular payments may be better to reduce the incentive to spend money on temptation goods; then again, if you win the lottery, the majority of spending may be temptation goods regardless.

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