A recent IZA discussion paper - "Fungibility, Labels, and Consumption" (by Johannes Abeler and Felix Marklein) - discusses how the fungibility of money is a central principle in economics. The principle implies that any unit of money is substitutable for another and that the composition of income is irrelevant for consumption. However, a number of issues arise in relation to this issue. The first is whether the more relevant explanation is self-control: do some people find it hard not to spend an entire 50 euro note if it is in their wallet? One commitment device may be to only carry smaller denominations that are more in line with budget constraints.
Of course, another issue is that commitment devices imposed at the time of cash withdrawal at ATM machines shouldn't really matter in this age of credit-card and debit-card finance. Abeler and Marklein find that many people do not treat money as fungible - "When a label is attached to a part of their budget, subjects change consumption according to the suggestion of the label... The findings lend support to behavioral models such as narrow bracketing or mental accounting." However, it is debatable as to whether the labelling issue in the fungibility experiment translates to everyday scenarios. This is due to the presence of credit in real-world financial decision-making. Furthermore, the issue of self-control might be more salient than labelling in everyday scenarios.
1 comment:
I would have thought that the commitment device would work the other way. I would be much more likely to purchase a chocolate if I have loose change rolling around in my pocket than if I just have a €50 note. Quite apart from the appeal of offloading annoying coins, using coins avoids the social awkwardness of being asked by the sales assistant "have you nothing smaller?" and the increased risk - will this vending machine give me change?. Also, psychologically it is a big step to break a nice rare note into the less totemic sum of its parts
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