Financial Concerns, Cognitive Abilities, and Economic Decisions

Policy Context

We investigate whether the timing of unconditional cash transfers impacts beneficiaries’ labor productivity and decision-making processes. Cash transfers are some of the most commonly used policy tools to alleviate poverty worldwide. Understanding how the timing of transfers affects economic outcomes is crucial for correct program design and evaluation. 

Our results reveal new and unintended effects of the timing of cash transfer programs on its beneficiaries, arguably driven by the psychological impact of individuals anticipating immediate access to cash. Even minor variations in transfer timing can lead to significant behavioral changes in labor supply and long- and short-term consumption choices. By incorporating this insight into program design, policymakers can better anticipate potential outcomes and tailor interventions to maximize effectiveness.

Study Design

We run a lab-in-the-field experiment in Nairobi, Kenya, in collaboration with the Busara Center for Behavioral Economics. Lab activities happened over two consecutive days. On Day 1, we collected participants’ baseline characteristics and assigned treatment. On Day 2, we measure participants’ labor productivity and consumption decisions. 

We organize this study around two experimental groups. At the end of Day 1, participants in the money-sooner group learned that they would receive KES 2,000 (approximately $15) at the end of Day 2, after all activities were over. Participants in the counterpart, money-later group learned they would receive KES 2,200 (approximately $16.5) 31 days later, a 10% adjustment to reflect the local credit market. 

This variation in timing creates distinct psychological environments for beneficiaries. Participants in the money-sooner group make decisions framed by the certainty of having incoming cash at the end of Day 2. Participants in the money-later group make those same decisions framed by the certainty that the new cash will only arrive on Day 31, and thus their expenses until that date will need to be met with other personal and work arrangements. We hypothesize that this distinction in participants’ decision-making environment generates psychological effects that influence consumption, decision-making process, and labor productivity, even though the transfers are comparable in their monetary value.

Results and Policy Lessons

We find that beneficiaries expecting later transfers were more productive in piece-rate labor and more consistent in consumption decisions than those expecting sooner, equivalent transfers. While the effects on consumption choice appear in both long- and short-term decisions (with real-stakes health insurance plans and food bundles, respectively), the effects on productivity only show in tasks with low cognitive demand. The two groups’ labor supply are statistically equal in activities that demand high cognitive resources.