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Digital Payments and Consumption: Evidence from the 2016 Demonetization in India

Author

Listed:
  • Sumit Agarwal
  • Pulak Ghosh
  • Jing Li
  • Tianyue Ruan

Abstract

We study how consumer spending responds to digital payments, using the differential switch to digital payments across consumers induced by the sudden 2016 Indian Demonetization for identification. Digital payment use rose by 2.94 percentage points and monthly spending increased by 2.38% for an additional 10 percentage points in prior cash dependence. Spending remained elevated even when cash availability recovered. Robustness analyses show that the spending response is not driven by purchase substitution, income shocks, credit supply, or price changes. We provide causal evidence that digital payments increase consumer spending due to subdued endowment effects.

Suggested Citation

  • Sumit Agarwal & Pulak Ghosh & Jing Li & Tianyue Ruan, 2024. "Digital Payments and Consumption: Evidence from the 2016 Demonetization in India," The Review of Financial Studies, Society for Financial Studies, vol. 37(8), pages 2550-2585.
    • Handle: RePEc:oup:rfinst:v:37:y:2024:i:8:p:2550-2585.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhae005
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    More about this item

    Keywords

    D12; D14; D91; E21;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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