Buying Consumption Smoothing: Saving for the Future by Buying Ahead

Abstract

This study considers an under-explored channel through which credit-constrained house- holds may smooth consumption – buying ahead. We employ a differences-in-differences-in- differences strategy and exploit variation from state tax laws introduced in different states in different years. Using toilet paper as an example of a widely bought, necessary and storable product, we compare how households’ purchasing behavior changes in response to transitory income from tax refunds. We find that households increase the amount of toilet paper purchased by around 20% in response to a state income tax refund, but do not increase the purchased quantity of perishables. The inter-purchase time for toilet paper also increases, ruling out that households are simply increasing consumption in response to more income. Finally, households increase expenditures on toilet paper only by 11%, indicating that they are saving per unit by buying in larger quantities. Buying ahead appears to allow households to smooth consumption by purchasing a stockpile of non-perishable, necessary goods that they can slowly consume over time.