research institute for compassionate economics

Cognitive Limits, Apparent Impatience, and Monthly Consumption Cycles: Theory and Evidence from the South African Pension

Dean Spears, on February 27th, 2012

Larger reactions to earlier incentives are usually attributed to time preference. However, cognitive limits could also generate behavior that appears impatient. We present a simple model illustrating “local” intertemporal decisions, then apply this interpretation
to the puzzle of monthly consumption increases upon receiving predictable income: limited cognition explains stylized facts that preferences cannot. A survey experiment among South African pension recipients verifies novel predictions. Consumption cycling
was concentrated among participants with low cognitive resources. This effect was greatest for participants with variable spending needs. Simulations explore heterogeneous effects of changing policy towards more frequent benefit payments, which could increase cycling.

Published: Working Paper       Geography: South Africa
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