Unpredictable income poses a significant threat to economic stability for many U.S. households. While budgeting may help to mitigate some of the negative effects of unpredictable income, the process of budgeting can also be more challenging under such circumstances. This paper presents new evidence on the relationship between income predictability, financial wellbeing, and budgeting behavior using cross-sectional data from a nationally-representative panel of nearly 4,000 U.S. adults. We document a strong negative relationship between income unpredictability and financial wellbeing. However, the strength of this negative relationship is substantially attenuated for those who budget. This suggests that budgeting may be a useful tool for mitigating the adverse effects of unpredictable income. Despite these benefits, the propensity to budget is significantly lower among those with the most unpredictable income. These findings indicate the need for policy reforms aimed at insuring households against unpredictable income flows rather than targeting individual-level financial management strategies.

We study a large-scale (n=50,000) natural field experiment implemented by the U.S. Social Security Administration that was aimed at increasing the timely and accurate self-reporting of wages by Supplemental Security Income (SSI) recipients. Sending a letter reminding SSI recipients of their wage reporting responsibilities significantly increased both the likelihood of reporting any earnings and the total amount of earnings reported, though this effect decays slightly over time. However, the specific letter content—providing social information or highlighting the salience of penalties—had no systematic effect. We develop a conservative estimate that the letters generated roughly $5.91 in savings on average per dollar spent for the U.S. government.

Although budgeting is widely considered a common method of managing household finances, surprisingly little is known about the budgeting process. Using a nationally-representative survey (N=3,826) of US adults, we examine budgeting behaviors and beliefs, including who budgets and why, how individuals categorize consumption, and how they adjust their behavior after over- or under-spending. We identify five facts that illuminate key features of budgeting and supplement findings with administrative data (N=194,678) from a large financial institution in Australia. Understanding systematic patterns in how individuals and households budget can serve a critical role in informing economic models of consumption-savings behavior.

What motivates the rich and powerful to exhibit generosity? We explore this important question in a large field experiment. We solicit donations from 32,174 alumni of an Ivy League university, including thousands of rich and powerful alumni. Consistent with past psychology research, we find that the rich and powerful respond dramatically, and differently than others, to being given a sense of agency over the use of donated funds. Gifts from rich and powerful alumni increase by 100-350 percent when they are given a sense of agency. This response arises primarily on the intensive margin with no effect on the likelihood of donating. Results suggest that motivating the rich and powerful to act may require tailored interventions.

Households often receive income and make consumption decisions at different frequencies. Misalignment between these two frequencies can generate variation in income that standard theory predicts should have little effect on spending. I test this prediction by exploiting variation in monthly income arising from the timing of biweekly pay. Biweekly workers typically receive two paychecks per month except for two months of the year, when they receive three. I find that spending increases by 18.4% following three-paycheck months and document that liquidity constraints likely cannot explain this result. I conclude by discussing several alternative explanations including heuristic thinking and mental accounting.

Many households prefer to pay their bills in person. In response, utilities companies have increasingly leveraged existing retail networks to serve as authorized third-party payment centers. We study whether households are induced to take out loans that they otherwise would not when given the opportunity to pay their bills at payday loan storefronts. Specifically, we examine how payday loan usage changed in response to a 2016 Missouri regulation that banned utilities from using payday lenders as authorized agents. While this regulation decoupled the act of making in-person bill payments from visiting a payday lender, it made no change to the access of payday loans. Using data from the National Survey of Unbanked and Underbanked Households and a quasi-experimental synthetic control approach, we find that the bill payment regulation led payday loan usage in Missouri to decline by 0.5 percentage points more than it otherwise would have in the absence of the policy change. This effect is large and represents a 17.8 percent decrease relative to the baseline pre-period mean. These findings have important implications for policymakers and financial institutions that aim to improve the financial wellbeing of low-income households.

 

Other Publications

Perspectives on Mental Accounting: An Exploration of Budgeting and Investing
(with Abigail B. Sussman), Financial Planning Review, 1(1-2):e1011, 2018

 

The Role of Mental Accounting in Household Spending and Investing Decisions
(with Abigail B. Sussman) in C. Chaffin (Ed.), Client Psychology, New York: Wiley, 2018

 

Behavioral Economics and Health
(with Judd B. Kessler) in R. Detels, M. Gulliford, Q. Karim, and C. Tan (Eds.), The Oxford Textbook of Global Public Health, 6th edition, Oxford: Oxford University Press, 2015