How household consumption responds to credit card refunds

• Published in: Economics letters Vol. 198; p. 109683
• Main Authors: Xu, Yonghao, Meng, Juanjuan, Zhang, Yu, Koo, Jeffrey
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.01.2021; Elsevier Science Ltd
• Subjects: Accounting theory; Consumer behavior; Consumption; Credit; Credit card refunds; Credit cards; Credit unions; Mental accounting; MPC; Predictive control; Refunds; Wages & salaries; Consumption; MPC; Credit card refunds; D12; D11; E21; Mental accounting
• ISSN: 0165-1765; 1873-7374
• DOI: 10.1016/j.econlet.2020.109683

With the widespread growth of online commerce, we observe an increasing amount of refunds on purchases. Do these refunds affect consumption differently than regular income such as salaries? This paper uses transaction-level data from a bank to examine the marginal propensity to consume (MPC) of credit card refunds. We find that the MPC of credit card refunds is approximately 0.7 for the following week, while the MPC of salaries is only 0.021. We also find that the MPC increases with the refund size while decreases with salary amount. These findings add novel evidence to the mental accounting theory from refunds on purchases. •Credit card data indicates that the marginal propensity to consume (MPC) out of refunds on purchases is much larger than that of salaries.•The MPC increases with the size of credit card refunds but not salaries.•These findings from refunds on purchases add novel evidence to the mental accounting theory.