When a Dollar is Not a Dollar: Examining How Timing and Delivery of Government Payments Influence Household Decision-Making

• In Event: Taxpayer Decision Making in Light of Tax Authority Choices and Emotions

Abstract

From a purely economic standpoint, every dollar should be equivalent regardless of where it comes from and how it is received. However, mental budgeting theories highlight cognitive biases that lead individuals to deviate from pure economics, treating money differently based on economically irrelevant characteristics. As governments implement policies to transfer wealth to households (e.g., refundable tax credits, stimulus payments, etc.), this notion is important to both policymakers and society because the payment timing and delivery method of these government transfers may impact how the recipients use them. We conduct a 2 x 2 experiment to investigate whether payment timing (periodic vs lump sum) or payment delivery method (standalone or combined with other payments) impacts household budgeting decisions. Consistent with our predictions, results show budgeting decisions change more when payments are either made in lump sums (as opposed to periodic payments) or standalone (as opposed to combined). Specifically, only participants who receive payments that are both combined with other payments and paid periodically do not change how they make budgeting decisions (as compared to their own previous decisions) when receiving a government payment. Our findings extend theory on mental budgeting and provide insights to regulators regarding the importance of distribution choices to achieving policy goals.

Authors

• Ethan G LaMothe, University of Central Florida

• Mary Elizabeth Marshall, Louisiana Tech University

• Jason M Schwebke, Texas Tech University