recession

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Wharton’s journal of management explains how car maker Hyundai pulled off the remarkable feat of selling more cars in 2008 than it did in 2007. When the economic downturn hit, Hyundai came up with a marketing strategy that a behavioral economist would admire. The promotion that has gotten the most attention (and has been copied by other companies in and out of the auto industry) allows you to return a car if you lose your job. This strategy is particularly appropriate for Hyundai, whose customer base is most affected by the recession. But Hyundai also unveiled another marketing strategy that has gotten less attention.

In another surprising marketing move, the company last month offered to send buyers of some Hyundai models up to $333 a month for six months. The catch: The deal applies only to cars on which Hyundai is offering rebates. Buyers may opt for either the rebate or the monthly check (not both), and the value of the two offers is about equal. But such programs tend to generate consumer buzz.

Amol Agrawal says this offer seems to fly in the face of a classic behavioral economics finding. Behavioral economics has shown that people are impatient. Very impatient. They will take much smaller amounts now (say $10) rather than wait a week for an amazing return on their money ($20). Factoring in interest, Hyundai is offering more money to people who want it all up front. In this uncertain economic environment, Hyundai thinks some patient people will choose the option of a steady cash flow even if it costs a little dough. Why? Well, plenty of lottery winners faced with this very choice opt for the stream of payments. But they are dealing with millions of dollars in winnings. This is much less. Are people tempted to spend the single lump sum payment? People tend to save windfalls of this size, which is why the tax breaks in the recent stimulus bill are being given out in small chunks in order to spur spending. But car rebates don’t come as large checks in the mail two months after you buy a car. They get subtracted from the purchase price at the dealership so they don’t seem like a windfall. It’s too early to know how many car buyers will bite on Hyundai’s offer. If lots do, behavioral economists and marketers might have a new factor to think about in their studies of human decision making.

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I think the answer depends on your circumstances. If you are carrying lots of credit card or other forms of debt I say your first priority should be to make progress on that. Call it a private bail-out of the banks if you want. If you are lucky enough to be solvent and you want to spend your money patriotically then I would encourage what might be called “home infrastructure” spending. There are lots of unemployed contractors out there. Get some bids on making your home more energy efficient. It is probably as good a financial investment as you can find these days, and will put some people back to work.

Read other economist’s suggestions at Real Time Economics.

Addendum: For readers who are a bit confused by the headline, $8 refers to the amount of money that will be added to most U.S. workers’ weekly paychecks starting in June, as a result of the recently signed stimulus bill.

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