Digital Payments and Consumption: Evidence from the 2016 Demonetization in India.

This article examines the causal impact of digital payment adoption on consumer spending, leveraging the sudden 2016 Indian Demonetization as a natural experiment. Using transaction-level data from a large Indian supermarket chain and an instrumented difference-in-differences approach based on consumers’ prior cash dependence, the study finds that increased use of digital payments led to a significant and persistent rise in monthly spending, with a 1-percentage-point increase in digital payment share causing approximately a 0.81% increase in spending. The analysis rules out alternative explanations such as purchase substitution from informal to formal markets, income shocks, credit supply changes, and price effects. Comparing offline supermarket purchases with online grocery shopping, where cash payments occur as cash on delivery, the study attributes the spending increase primarily to subdued endowment effects—behavioral factors causing consumers to feel less attached to money when paying digitally—rather than reduced transaction costs. The findings also indicate that spending increases are more pronounced on temptation goods and among lower-income consumers, suggesting potential risks of overspending associated with digital payment adoption.