Smoothing Income or Not? Households’ Payment Choice Between Credit and Debit at Point-of-Sale

Abstract

A basic element of consumer behavior can be observed through shopping trips. Today’s consumers have access to different monetary instruments to pay for goods and services. In the U.S., debit cards and credit cards are the most widely used means of payment. Assessing consumer payment behavior for point-of-sale transactions is a good source of information on market opportunities for various stakeholders. This dissertation examines the effect of consumer and transaction characteristics on the use of different electronic payments. We employed non-parametric approaches and generalized linear models to investigate the influence of transaction value, income, and other socio-demographic factors on households’ probability of using credit. Our research was undertaken for the U.S. census regions over a five-year period (2015 – 2019) for different income groups. The incorporation of multiple locations, years, and income groups allow us to identify the existence of heterogeneity among consumers and perform cross-state comparisons. These considerations add to the consumer payment literature and provide better and more targeted results to help with policy making. Our transaction value results provided evidence for income smoothing when the cost of the shopping trip increased and highlighted the importance of controlling for household effects and the proper construction of the expenditure variables. We found heterogeneities among households and strong evidence of consumer behavior differing across income groups. These results provide insights to merchants, the financial sector, and policy makers on sale potential, improving the payment technologies, and monetary policy decisions, respectively.