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Payment Frequency Impacts Consumer Spending

How getting paid more frequently affects how much you spend.

The Gig Economy and Your Paycheck

The gig economy is growing. Before the pandemic, 3 out of 10 Americans had more than one job. It’s now much more likely for people to hold multiple jobs, work on numerous projects, or hold irregular employment. While workers’ total income may not have changed much, it consists of more and more payments.

What happens when you get smaller paychecks at a larger frequency rather than larger paychecks at smaller frequency? Past research suggests that getting paid more often will make your consumption more distributed, but surprisingly little is known about spending levels. In a perfectly rational world, and assuming your total income is the same, payment frequency should make no difference to spending. In the real world, however, being paid more frequently could also decrease spending, because purchases made from a small pot of money should feel more expensive than those made from a large pot. Or maybe the opposite will happen? Folk wisdom and anecdotal evidence may support one or the other theory.

How Payment Frequency Affects Spending Levels

This is where new research by Wendy De La Rosa and Stephanie Tully, published in the Journal of Consumer Research, comes in.

To find answers, the researchers analyzed more than 5 million banking transactions from over 30,000 consumers at a U.S. bank. Their data included both credits (income) and debits (expenses). Statistical models show that payment frequency is a significant predictor of total spending. Both the number of expenditures and the amount of spending become greater with higher payment frequency. In their models, getting paid every workday instead of once a week leads to a monthly spending increase of about $20.

Unfortunately, correlations in banking transactions don’t tell us much about causation. To get closer to understanding causality, De La Rosa and Tully needed to conduct experiments. Most of those involved online life simulations in which participants either got paid more frequently (e.g. daily) or less frequently (e.g. weekly). They were then faced with a series of decisions with a more expensive option (e.g.. an expensive pair of jeans) and a less expensive option (e.g. a cheap pair of jeans). Results show that participants who got paid more frequently chose the more expensive options significantly more often and spent more money on average (20% and 10% more, respectively, in one of their studies).

The Role of Prediction Uncertainty and Wealth Perceptions

Why does this happen? The authors note that

compared to those with higher payment frequencies, those with lower payment frequencies experience larger and more frequent daily decreases in their overall resource levels, as expenses occur very frequently with no income to offset them. For example, a consumer with a weekly payment frequency typically experiences a resource increase four times per month and a resource decrease on all other days when there is an expense, resulting in a general pattern of resource decumulation. In contrast, a consumer with a daily payment frequency will experience smaller and less frequent daily resource decreases as their income offsets expenses as they occur.

These differences affect how consumers feel about their financial resources—their subjective wealth perceptions. To test this hypothesis, the researchers asked participants about subjective wealth perceptions (e.g. “Based on your experience in the life simulation, how often did you feel like you had more than enough money?”) and prediction uncertainty” (e.g. “My daily income and expenses made it difficult to predict whether I would have enough money throughout the simulation”). Their studies show that being paid more frequently is associated with less uncertainty about having enough money to cover future expenses, which in turn gives consumers the feeling of having more than enough money, ultimately leading to greater spending.

The relationship between payment frequency and spending is not due to differences in objective wealth levels. According to findings from an additional experiment, the effect persist even when those in lower payment frequency conditions are objectively more wealthy. Finally, the fact that participants didn’t have a choice in their payment frequency also doesn’t explain the finding. The last experiment reported by the researchers made access to higher payment frequency optional, and participants had to request additional paychecks. Those who chose to get paid daily still spent more than those who didn’t.

Questions for the Future

The results from this work raise some interesting questions.

The authors of the article speculate how payment frequency might affect other kinds of behavior, such as savings. Since greater payment frequency enhances subjective feelings of wealth, it could lead to higher savings, but this might be offset by the increased spending that is also associated with being paid more often.

It would also be interesting if future investigations analyzed cross-national data. While salaried workers in the U.S. have traditionally been paid at least once every two weeks, most European employees get paid monthly. It would be difficult to also account for all other variables that affect spending, but it might be worth conducting additional studies to see if the effect of payment frequency on spending is also evident as a result of different payment regimes.

Practical Implications

The most important question raised by the research is about practical implications. How can we help people who get paid frequently avoid spending more than their less frequently paid peers? The most obvious answer is to encourage consumers to opt for less frequent paychecks if they are given the choice.

Financial institutions could also help consumer by encouraging consumers who get paid frequently group their debit transactions (expenses) into fewer days. This would foster feelings of resource decumulation, as expenses wouldn’t be offset by income as much anymore. It would also serve as a self-control device for consumers, as they need to maintain sufficient resources to cover greater (but less frequent) daily expenses.

A final way of influencing behavior that is frequently used by behavioral economists relates to information access and salience. The frequency at which you see information about financial transactions and the attention you pay to different kinds of information affect your financial decisions. Would frequently paid consumers with less exposure to their bank account transactions still spend significantly more than those who are paid less often? There’s lots of useful research that could still be done to help consumers break the link between payment frequency and spending.

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