The Impact of Government Transfer Payment Frequency on Consumption: Evidence from Delayed UI 
Some forms of government cash transfers are disbursed weekly or monthly. These include benefits from Social Security, the Supplemental Nutrition Assistance Program, and unemployment insurance (UI). Others, such as refunds from the Earned Income Tax Credit and the Child Tax Credit, are disbursed annually in lump sums. This paper studies how the payment frequency of transfer programs can affect the spending behavior of liquidity-constrained individuals by exploiting the shock to the timeliness of UI payments at the start of the COVID-19 pandemic, when the number of UI claims surged from fewer than 1 million in February 2020 to nearly 19 million in April 2020. This large influx of claims resulted in some claimants receiving their UI payments on a weekly basis throughout their unemployment spell and others having to wait many weeks before receiving backdated payments in the form of large lump sums. The paper uses transaction-level data on income and spending for a low-income sample of individuals to identify UI claimants who experienced payment delays and compare their spending behavior with that of claimants who obtained their benefits in a timely manner.
Key Findings
- Spending by delay-affected individuals dropped by 46 percent of the income decline over the roughly five-week period that UI payments were delayed and rebounded completely once the backdated UI payments were received. These results suggest that the sample’s delay-affected individuals did not have sufficient liquidity to smooth the income shock.
- Evidence suggests that the affected individuals mitigated their welfare losses by temporarily reducing their discretionary spending on, for example, purchases from big box and clothing stores, home maintenance, and debt service payments.
- Once individuals received the backdated UI payments as lump sums, spending on vehicles, hardware items, home maintenance, and auto maintenance increased substantially, suggesting that these individuals used the lump sums to reallocate spending toward infrequently purchased and high-value categories, which are dominated by durables.
- Data from the Consumer Expenditure Survey covering the 2019–2021 period indicate that households in states with greater exposure to UI payment delays (and hence more exposure to lump-sum transfers) increased their expenditure on durables relative to nondurables.
Implications
The paper’s findings highlight how the frequency of government transfer payments can influence the spending behavior of individuals who are liquidity constrained, as is likely the case for many recipients of cash transfers. For such individuals, periodic payments can support nondurable consumption, which is coincident with spending, whereas infrequent lump-sum payments can act like forced saving that supports expenditure on big-ticket durables. These results point to the potential benefits of using mixed-frequency payments for government transfer programs that currently disburse payments only in lump sums.
Abstract
We study how the frequency of government transfer payments affects spending behavior. Our empirical approach uses transaction-level data on income and spending and exploits quasi-random delays in the receipt of unemployment insurance (UI) benefits. Spending drops by about half of the loss in income that occurs while individuals wait for UI benefits, revealing the value of periodic payments for liquidity-constrained individuals. Once delayed payments are received as lump sums, individuals reallocate spending toward less commonly purchased big-ticket categories that are dominated by durables. Our findings suggest that transfer programs with mixed frequencies, such as advance disbursements of lump-sum tax credits, can be beneficial to recipients.