PhD Lunch Seminars Amsterdam

David Kunst (VU Amsterdam)
Tuesday, 14 March 2017

Motivated by evidence of mental accounting and non-fungibility in spending different types of income, this paper tests whether also the choice when to be paid depends on the income type. A framed field experiment in Kenya asks dairy cooperative members to allocate both their regular milk payments and an irregular windfall between two dates. We find that participants allocate milk payments to the later of the two dates, while allocating the windfall to the sooner date. Most participants self-report deferring their milk payments in order to save for lump-sum expenses. Those planning to use milk payments for smaller, more frequent purchases are less likely to defer payments. This suggests that farmers earmark regular milk payments, but not the irregular windfall, for bulky expenditures, and potentially explains why experimentally elicited discount rates are often higher than those inferred from empirically observed savings rates. We argue that this has important implications for the design of informal contracts in a context with thin financial markets, given that contract compliance will then depend on whether the timing of payments coincides with recipient preferences.
(joint with Berber Kramer)