The Role of Risk Perception in Determining Consumer Cash Balances: A Study of Three Countries

• Activity Number: 121
• Type: Topic Contributed
• Date/Time: Monday, August 5, 2013 : 8:30 AM to 10:20 AM
• Sponsor: Survey Research Methods Section
• Author(s): Ben Mazzotta*+ and Bhaskar Chakravorti
• Companies: Tufts University and Tufts University

Abstract

Why do people hold cash in their wallets? And is the answer the same in different countries? Survey evidence indicates that cash has different uses in different countries, ranging from daily purchases to hedges against bank crises and currency collapses. We study the role of consumer risk perceptions in bounding household cash balances in the United States, Egypt and Mexico. From the standpoint of cash as a payment instrument, there are two principal risks consumers bear with regard to choice of cash balances. When cash balances are too low, consumers face the risk of having insufficient cash for payments where counterparties only accept cash, or for those where cash use confers additional benefits (pricing, privacy, or other social benefits). Conversely, high cash balances bring additional risk of loss. Rather than study the incidence of losses and cash-only transactions directly, we study consumer perceptions of risk from either too high or too low cash balances. We compare the relationships between risk perception and cash balances in several countries, controlling for key financial and demographic traits.