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
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 in order to propose a new indicator of financing constraints that is based on the cognitive load they generate (Mullainathan and Shafir, 2013). Survey respondants 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 with (unsupervised) ML/EM techniques and obtain 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 between 30% and 84% depending on their wage level, 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 dropping instantaneously at that date, which through the lens of a simple model is indicative of end-of-month financing (liquidity) constraints. This pattern furthermore reveals that the cognitive cost induced by these financing constraints arises from not too concave (or convex) costs of achieving high levels of attention, and convex costs of maintaining it over time.