The effect of financial scarcity on discretionary spending, borrowing, and investing

Abstract

Past research indicates that individuals with scarce resources focus on urgent needs. We hypothesize and find that individuals with scarce financial resources have greater discretionary expenditures such that they engage in more discretionary spending, borrowing, and investing. We demonstrate that one possible explanation for why those with scarce financial resources have greater discretionary expenditures is because they have more optimistic future perceptions. We support our predictions using a sample of over 60,000 observations from a survey in rural India, two archival datasets from surveys in Italy and Germany, and two preregistered online experiments. We control, test, and rule out different alternative explanations. The results of this research extend the findings in the financial scarcity and discretionary consumption literature. Additionally, we provide actionable guidelines for managers and public policy makers on how to nudge individuals with financial scarcity.

On subjective well‐being and excess strategy to cope with financial‐scarcity problem

“…Indeed, economics would no longer be a useful subject” (Samuelson & Nordhaus, 2001, quoted in Daoud, 2018, p. 208). Beyond economists, the problem of scarcity also attracted sociologists (e.g., Abbott, 2014; Booth, 1984), psychologists (e.g., Cannon et al, 2019; Diener et al, 1999; Hamilton et al, 2019), and marketing researchers (e.g., Goldsmith et al, 2020; Kristofferson et al, 2017; Sarial‐Abi et al, 2023). Among various scarcity types addressed in literature (see Daoud, 2018 for a discussion), financial scarcity is particularly universal and affects both consumers' behavior (Sarial‐Abi et al, 2023; Sharma & Alter, 2012; Tully et al, 2015) and individuals' well‐being (Diener et al, 1999; Mullainathan & Shafir, 2013).…”