Purchase Patterns affected by Budget Spending Rules

Ken Mogi and Yoshi Tamori

Abstract

The efficient spending of public money is a matter of social concern. In the regulations of many countries, at the end of fiscal year, the unused budget “expires” and the remaining money is returned to the treasury, with the budget for the following year possibly reduced. In response, people in their spending capacities tend to use up the remaining budget towards the end of the year, in a “use it or lose it” mentality. Here we reproduce this “end-of-year spending binge” in an experiment, where subjects tend to spend excessively towards the end of fiscal year. We show that by modifying the budget rule so that the remaining money is “carried over”, the excessive spending can be significantly curbed. Our results suggest that experiments in the laboratory can be used to study people’s budget spending behavior and identify factors that affect wasteful overspending, potentially helping design financial rules that encourage effective use of budget.