'Repayment-by-Purchase' Helps Consumers to Reduce Credit Card Debt

Grant E. Donnelly; Cait  Lamberton; Stephen  Bush; Zoe  Chance; Michael I. Norton

Working Paper | HBS Working Paper Series | 2020

'Repayment-by-Purchase' Helps Consumers to Reduce Credit Card Debt

by Grant E. Donnelly, Cait Lamberton, Stephen Bush, Zoe Chance and Michael I. Norton

Abstract

Many consumers struggle to repay their credit card debt, in part because paying small portions of large bills often feels fruitless. We introduce a novel credit card payment option—repayment-by-purchase—and examine its influence on both the amount consumers’ repay and their perception of progress toward reducing their debt. With typical repayment, consumers simply enter the amount they wish to pay toward their total balance—often the minimum required payment. With repayment-by-purchase, in contrast, consumers can select specific purchases (e.g., a coffee at Starbucks, a utility bill) that they wish to repay, and make payments specifically directed toward “eliminating” these purchases. Five studies reveal that repayment-by-purchase increases awareness of what is being repaid, which increases perceptions of progress toward reducing debt, which in turn encourages higher repayment. In a large field experiment, credit card customers who were given the opportunity to allocate their payment toward specific purchase categories paid 12.18% more toward their debt balance than a control group. These findings advance our practical understanding of how consumers can be encouraged to pay more toward credit card debt and offer conceptual insight into how both increased awareness and perceived goal progress enhance consumer motivation to get out of debt.

Language: English

Format: Print

64 pages

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Citation:

Donnelly, Grant E., Cait Lamberton, Stephen Bush, Zoe Chance, and Michael I. Norton. "'Repayment-by-Purchase' Helps Consumers to Reduce Credit Card Debt." Harvard Business School Working Paper, No. 21-060, November 2020.

While global wealth has risen over the past few decades, this has not translated into a less stressful life for most people. In fact, stress has risen for people worldwide. Across six studies— including large-scale survey data from over 150 countries—we show that the typically observed negative association between stress and unhappiness depends critically on the value that people place on work. Using various measures of work values—including individual and area-level historical Protestantism, peer-group working hours, and self-reported measures—we show that the strength of the negative impact of stress on subjective well-being depends upon the extent to which individuals, societies, and cultures more broadly value productive work as a good in itself. These findings emphasize the importance of the “psychological fit” between actions and values in shaping subjective well-being. Using large-scale time-use data, we show that the moderating role of work values can be largely explained by the extent to which these values shape how enjoyable leisure activities are, rather than how they affect people’s experience of work-related activities themselves.

Two experiments, including one incentive compatible study, examine the impact of cutting pay for executives versus employees in response to COVID-19 on consumer behavior. Study 1 explores the effect of announcing cuts or no cuts to CEO and employee pay, and shows that firms’ commitment to paying employees their full wages leads to the most positive consumer reactions. Study 2 further examines the effects of announcing employee and CEO pay cuts: though announcing CEO pay cuts in tandem with employee pay cuts can help mitigate the negative effects of employee pay cuts, consumers respond most positively to firms which prioritize paying employees regardless of their strategy for CEO pay. These positive perceptions are mediated by perceptions of financial pain to employees. We discuss the implications of our results for firms and policy-makers during economic crises.

Article | Journal of Personality and Social Psychology | August 2020

Does Spending Money on Others Promote Happiness? A Registered Replication Report

Lara B. Aknin, Elizabeth W. Dunn, Jason Proulx, Iris Lok and Michael I. Norton

Research indicates that spending money on others—prosocial spending—leads to greater happiness than spending money on oneself (e.g., Dunn, Aknin, & Norton, 2008, 2014). These findings have received widespread attention because they offer insight into why people engage in costly prosocial behavior, and what constitutes happier spending more broadly. However, most studies on prosocial spending (like most research on the emotional benefits of generosity) utilized small sample sizes (n < 100/cell). In light of new, improved standards for evidentiary value, we conducted high-powered registered replications of the central paradigms used in prosocial spending research. In Experiment 1, 712 students were randomly assigned to make a purchase for themselves or a stranger in need and then reported their happiness. As predicted, participants assigned to engage in prosocial (vs. personal) spending reported greater momentary happiness. In Experiment 2, 1950 adults recalled a time they spent money on themselves or someone else and then reported their current happiness; contrary to predictions, participants in the prosocial spending condition did not report greater happiness than those in the personal spending condition. Because low levels of task engagement may have produced these null results, we conducted a replication with minor changes designed to increase engagement; in this Experiment 3 (N = 5,199), participants who recalled a prosocial (vs. personal) spending memory reported greater happiness but differences were small. Taken together, these studies support the hypothesis that spending money on others does promote happiness, but demonstrate that the magnitude of the effect depends on several methodological features.

Keywords: prosocial spending; Generosity; well-being; replication; Happiness; Behavior; Spending;

Citation:

Aknin, Lara B., Elizabeth W. Dunn, Jason Proulx, Iris Lok, and Michael I. Norton. "Does Spending Money on Others Promote Happiness? A Registered Replication Report." Journal of Personality and Social Psychology 119, no. 2 (August 2020). View Details

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'Repayment-by-Purchase' Helps Consumers to Reduce Credit Card Debt

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