Paycheck Receipt and the Timing of Consumption

This paper examines the consumption response to monthly paycheck receipt. Since the amount and arrival date of paychecks are known in advance, the receipt of a paycheck does not coincide with the receipt of new information. Under the basic rational expectations Life-Cycle/Permanent Income Hypothesis, household consumption should not respond to paycheck arrival. Using data from the United Kingdom's Family Expenditure Survey, this paper finds that household consumption is excessively sensitive to paycheck receipt. The results cannot be explained by any underlying monthly expenditure fluctuations common to all households. The presence of liquidity constraints as measured by wealth can account for the excess sensitivity results although the availability of credit cards cannot.