Government policy, strategic consumer behavior, and spillovers to retailers: The case of demonetization in India

61 Pages Posted: 29 Mar 2021 Last revised: 16 Apr 2021

See all articles by Yewon Kim

Yewon Kim

Stanford Graduate School of Business

Pradeep K. Chintagunta

University of Chicago

Bhuvanesh Pareek

Indian Institute of Management (IIM), Indore

Date Written: April 14, 2021

Abstract

This paper studies strategic consumer shopping behavior in response to a macroeconomic policy in the case of currency reform, and quantifies its unintended consequences for retailers vis-a-vis the policy goal. Using transaction-level data from a large retail chain in India, we document consumer strategies that leverage the presence of retailers to avoid costs associated with the country's currency reform policy. We observe both an increase in returns of cash-purchased items that were bought before demonetization (strategic returns) and a spike in final (unreturned) cash purchases with soon-to-be-illegal notes (strategic purchases). Both practices serve consumer incentives either to receive legal notes from the retailer or to avoid depositing cash in formal bank accounts. Our analysis suggests that strategic consumers benefited the retail chain overall while partly hindering the intended effect of the policy, leaving more than 20 million INR (0.3 million USD) of demonetized notes outside the formal tax network through this retail chain only; when we scale up the estimates to the country's market size, the estimated total impact is at least 100 billion INR (1.5 billion USD). Our findings (i) offer implications for policy makers by quantifying a wide spillover effect of government interventions that goes beyond the target group, and (ii) document a new role of the retail industry - of absorbing, and facilitating a response to, macro shocks.

Keywords: Strategic Consumer Behavior, Unintended Consequences, Product Returns, Currency Reform

Suggested Citation

Kim, Yewon and Chintagunta, Pradeep K. and Pareek, Bhuvanesh, Government policy, strategic consumer behavior, and spillovers to retailers: The case of demonetization in India (April 14, 2021). Available at SSRN: https://ssrn.com/abstract=3795602 or http://dx.doi.org/10.2139/ssrn.3795602

Yewon Kim (Contact Author)

Stanford Graduate School of Business ( email )

Pradeep K. Chintagunta

University of Chicago ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-8015 (Phone)
773-702-0458 (Fax)

Bhuvanesh Pareek

Indian Institute of Management (IIM), Indore ( email )

Prabandh Sikhar
Rau-Pithampur Road
Indore, Madhya Pradesh 453331
India

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