Payday is a Good Day for Retailers

Ann-Marie Vazzano

Consumers of all income levels spend more money on discretionary products such as clothes, entertainment and fast food on payday, according to new research from Michaela Pagel, an assistant professor at Columbia Business School, and Arna Vardardottir of Copenhagen Business School. By studying electronic payments made by consumers, the researchers found that more than half the population increases their spending on payday by more than 25%, regardless of the day of the week or month.

In the past, the thought was that payday spending was a response to lack of cash among the working poor or those well-off whose income was tied up in mortgages and other bills. This new research, however, says it may be a psychological response that causes people to spend more on payday. Regardless of budgets, payday makes consumers feel they’re flush with cash, which leads to increased spending.

“Payday spending is a completely understandable behavior from a common-sense standpoint, but it doesn’t make sense according to the economic models, which says people optimize their budgets across time,” says Pagel. “So theoretically, you shouldn’t see people consuming more just because they have more money one day—yet it happens.” GP