The price offered to coffee growers who turn in their “cherries” — ripe coffee beans — at Greenwell Farms in Kona, Hawaii, is $.90 per pound if they are paid weekly and $1.05 if paid monthly.
The weekly price is lower because it takes the company’s accountants more time to work out and record pay if they do it weekly rather than once a month. But what does this price differential imply about the grower’s discount rate? If he takes the weekly rate, on average he is getting $.90 one-half month earlier than he would get $1.05.
That implies an annual discount rate of nearly 4,000 percent — (1.05/.90)^24 – 1 — a truly remarkable rate of impatience. Despite this, the tour guide tells me that a lot of growers do take the lower rate of pay.
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If you factor in a budget constraint surely those calculations are incorrect? Presumably the reason for taking weekly payments is not due to severe impatience but due to practical issues such as needing more regular money. Although a fraction off the 4000% should the interest rate not be factored in also.
How financially stable are Greenwell farms? A unstable buyer could mean being prepared to buy a small risk premium, the difference between prices, to mitigate the farm not being there at the end of the month!
I agree with Richard that the need for immediate cash flow is a likely reason for the “impatience”. Knowing whether the farmers are living hand to mouth would be useful information. Another reason would be how much they trust the buyer to keep track of previous transactions or have the cash to pay them all at once.
BTW: I enjoyed reading some of your research in grad school and have a book of yours on labor economics.
I think we can also flip Richard’s stability argument, it may be that a grower who can be paid monthly is more likely to be around next month vs. a week-to-week grower.
It probably unlikely that the price is related to “cost” of making accountants work, since the most expensive accountant is the idle accountant. I would surmise it is more related to risks incurred by both parties in the transaction.
I think you get different answers depending one the timing of the sales… but I could be wrong.
Take simple numbers, say I sell 1 pound per week, for 4 weeks of the month.
So I get paid $0.90 at the end of the each week versus $1.05 *4 at the end of the month. I broke each week into a cash flow and solved for the discount rate that makes the 4 weeks equivalent to the $4.20, and I got around 17,000%
4000%? Banks should be falling over themselves to do some arbitrage here.
This is a typical trick to convince us that the poor are stupider and more impulsive with money than the wealthy.
Other examples are that poorer people in New York are more likely to buy individual rides for the subway instead of the greatly discounted weekly and monthly passes.
Implicit in this rhetoric is that the poor are to blame for their own situation, While both the poor and wealthy suffer from bouts of instant gratification- the poor also suffer from tight budget constraints. The farmer might not be able to afford to wait two weeks– just as a poorer New York commuter might not be able to afford the monthly pass.
Maximizing utility and thrift are luxuries many of the poor cannot afford. So this might not be “the price of impatience” but rather the price of poverty.
But is this a continuous market, or is some seasonality involved? If there are only a limited number of seasons, it would not be nearly so high.
I think I’ll agree with both lukas and Andrew. I think we should get together and buy week-to-week beans for $.99 sell them to and accept payment monthly from the processor for $1.05. The impoverished get 10% more for their situation, the processor saves money on accountants and I get $.06 for just for covering the gap.
There must be some other reason why this is not the story.