On the fungibility of public and private transfers: A mental accounting approach

A common assumption in economics is that money is fungible. In other words, spending patterns do not depend on the source of income, only on the total amount. The mental accounting theory, however, rejects this assumption by arguing that people compartmentalise their income into different mental accounts and decide on their consumption within each of these accounts. In this paper I hypothesise that households differently associate a private transfer coming from a migrant than a public transfer received from the government, and that this impacts the way transfers are spent. By analysing the first nationally representative longitudinal survey in South Africa, covering the years 2008, 2010 and 2012, I find evidence that public and private transfers are not spent in the same way.

JEL Classification: D1, D12, F24, J18, I38, E21

Keywords: Fungibility, Mental Accounting, Remittances, Social transfers, South Africa