Monthly wages increase savings

Monthly wages are an important step towards economic development, according to researchers from the University of Zurich (UKH), Switzerland. Their study, published in February 2019, shows  that dairy farmers and agricultural workers prefer to be paid once at the end of the month rather than daily, since monthly payment schemes are an efficient tool to increase savings.

Dairy farmers in central Kenya typically own two or three cows and produce and sell milk on a daily basis. They need the cash for daily consumption, but also need to set aside money for larger investments, such as cow feed or school fees. Previous research has shown that people struggle to build up savings or to cover unexpected one-off expenses when they are on a low, daily income.

Farmers would choose monthly payments, even if they are lower

When Kenyan dairy farmers are faced with the choice of receiving monthly or daily payment for their milk, 86 per cent of the farmers chose to receive end-of-month payments, even if this meant a 15 per cent lower price per litre of milk. When asked for the reason for this choice, the majority of farmers mentioned that they had set themselves savings goals and did not trust themselves to manage the money over the course of a month.

When given the choice between having the option to change back to the daily payments at any stage of the month, or committing themselves to a plan for the whole month, 93 per cent did not choose the more flexible option. Thus, the researchers assume that self-control concerns are the primary driver of the demand for monthly payments.

Small dairy buyers cannot keep up

Although there is a strong demand for monthly payments, the paying side  cannot keep up. Only one large dairy buyer in the study region provided the monthly payment option. The researchers point out that smaller operators do not have the credibility to offer such a payment schedule: Farmers are concerned that the small buyers would run away with the money due at the end of the month.

“Trust is crucial for economic development. With a credible third party or judicial organizations guaranteeing the payment, farmers would be willing to sell to smaller dairies and there would be more competition among milk buyers. Therefore, increasing contract enforcement helps the market to establish itself,” says Lorenzo Casaburi, assistant professor in the Department of Economics at UZH who co-authored the paper.

The study shows that people are willing to pay high prices for commitment measures addressing self-control problems. According to the authors, the mechanism proposed in the paper also applies for producers and workers in other countries.

“The findings on infrequent payments as a savings tool may be relevant for developed countries as well. For instance, many countries around the world, including Switzerland, introduced thirteenth salaries to provide workers with more liquidity to cover end-of-the year expenses,” explains Lorenzo Casaburi

(UZH/ile)

More information: 

Lorenzo Casaburi, Rocco Macchiavello. Demand and Supply of Infrequent Payments as a Commitment Device: Evidence from Kenya. American Economic Review. February 2019. DOI: 10.1257/aer.20180281
https://www.aeaweb.org/articles?id=10.1257/aer.20180281