DP16541 The Cognitive Load of Financing Constraints: Evidence from Large-Scale Wage Surveys

Author(s): Clémence Berson, Raphael Lardeux, Claire Lelarge
Publication Date: September 2021
Date Revised: November 2021
Keyword(s): Behavioral Inattention, Cognitive Costs, Poverty and Financing Constraints, Wage Volatility
JEL(s): C83, D14, I32, J31
Programme Areas: Labour Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16541

In this paper, we take advantage of the implicit cognitive exercise available in standard Labor Force Surveys to propose a new indicator of financing constraints which is based on the cognitive load they generate (Mullainathan and Shafir, 2013). Survey respondents are requested to report their monthly wages, which we compare to their administrative, fiscal counterparts. We propose a well-defined index of worker-level uncertainty which filters out their potential rounding behavior and reporting biases. We estimate it using (unsupervised) ML/EM techniques and find that workers tend to perceive their own wages with a degree of uncertainty of around 10%. Through the lens of a simple rational signal extraction model, this amounts to estimates of workers' attention ranging from 30% to 84% depending on their wage, education, tenure and gender. Most importantly, we show that the attention of the lowest paid 30% of workers is cyclical and increases steadily (by 17 percentage points) in the ten days preceding payday, before immediately dropping on that day, which through the lens of a simple model is indicative of end-of-month financing (liquidity) constraints. Furthermore, this pattern reveals that the cognitive cost induced by these financing constraints arises from the not too concave (or convex) costs of achieving high levels of attention, and the convex costs of maintaining them over time.