Developing economies are characterized not only by low incomes but also by low savings and apparent failures to take advantage of profitable opportunities for investment (e.g. de Mel at al. 2008). One common explanation is that the poor face temptations to misspend their income which they are unable to overcome given limited financial markets, and that aggregating steady streams of small amounts of income into larger lump sums would help mitigate these problems. This assumption has helped drive the research on commitment savings accounts (Ashraf and Karlan 2006, Brune et al. 2013). However, converting smooth income streams into larger, deferred sums may also lead to increased temptation and potentially poor choices - the proverbial effect of "money burning a hole in one's pocket". Banerjee et al. (2010) find evidence of this behavior among some users of microfinance in Hyderabad, and increasing temptation is consistent with anecdotal reports of behavior around payday in Malawi as well as research from the developed world (e.g. Stephens 2003). It is not currently understood what factors lead certain lump sums to be beneficial to achieving savings goals, while others lead people to give in to temptation, but the specific timing of the lump sum may play a role. This project uses an RCT to explore how the timing of wage payments changes the relative benefits of lump sums vs. small installments.
We partner with a local NGO to expand a public works program by 350 workers who are employed for 16 days over the course of three months (Oct through Dec 2013), subdivided into two rounds. Workers are cross-randomized into two sets of experimental conditions, separately for each round of the study. The first study arm varies whether workers receive their pay in a single, lump-sum payment or in weekly installments. The second study arm varies how tempting the environment is in which workers receive their payments: All workers receive their pay at the same location, which is the site of the major local market, but some receive their pay on the weekly "market day", while others receive it the day before. To ensure that all workers face equal transaction costs, everyone will come to the market for brief surveys on both days, irrespective of whether they are being paid. The main outcomes of interest are survey measures of saving level, expenditure composition, loans, and transfers, as well as uptake of a high-interest, zero-risk "bond" offered to all the workers in the study that provides an objective measure of savings behavior.