With limited income and many demands on their financial resources, it is especially important for poor households in developing countries to allocate their money deliberately across various expenditures. In Malawi, researchers investigated how paying workers in weekly installments versus as a monthly lump sum affected their spending on temptation goods, and if the timing of wage payments changed the impact of the payment structures. The study found that workers who received their income monthly in a lump sum had more cash left the week after payday and were 9.5 percentage points more likely to invest in a risk-free short-term “bond” than workers who received their pay in weekly disbursements. Moreover, when workers received their pay on market day they did not increase wasteful spending relative to those who received it the day before.
In general, people in developing countries have difficulty saving cash or other liquid assets, limiting their ability to buy desired goods or to take advantage of potentially profitable opportunities for investment. Saving may be especially hard in this setting because poor households face a range of “costs” to saving, such as risk of theft, high transaction costs, and social pressure to share earned income or wealth.1 In addition, people might be “present-biased,” prioritizing current desires over those they have for the future. People in developing countries invest considerable money and effort into receiving income in larger chunks in order to make costlier investments.2 As a result, combining small, frequent income payments into larger, less frequent lump sum payments may help the poor save for these larger purchases. However, in some cases converting regular income payments into a larger sum may lead to increased consumption of temptation goods. This effect of “money burning a hole in your pocket” has been raised in the microfinance industry, where there is concern access to loans may induce temptation spending. This study examined the role of income timing for spending and savings decisions and its interaction with issues of self-control.