The effect of financial scarcity on discretionary spending, borrowing, and investing

Past research indicates that individuals with scarce resources focus on urgent needs. We hypothesize and find that individuals with scarcer financial resources have greater discretionary expenditures such that they engage in more discretionary spending, borrowing, and investing. We demonstrate that one possible explanation for why those with scarcer financial resources have greater discretionary expenditures is because they have more optimistic future perceptions. We support our predictions using a sample of over 60,000 observations from a survey in rural India, two archival datasets from surveys in Italy and Germany, and two pre-registered online experiments. We control, test and rule out different alternative explanations. The results of this research extend the findings in financial scarcity and discretionary consumption literatures. Additionally, we provide actionable guidelines for managers and public policy makers on how to nudge individuals with financial scarcity.