The Effect of Compatibility Between Benefit and Payment Patterns in Evaluating Financing Decisions: a Test of the Alignment Hypothesis



Seigyoung Auh and Chuan-Fong Shih (2005) ,"The Effect of Compatibility Between Benefit and Payment Patterns in Evaluating Financing Decisions: a Test of the Alignment Hypothesis", in AP - Asia Pacific Advances in Consumer Research Volume 6, eds. Yong-Uon Ha and Youjae Yi, Duluth, MN : Association for Consumer Research, Pages: 78.

Asia Pacific Advances in Consumer Research Volume 6, 2005      Page 78


Seigyoung Auh, Brock University, Canada

Chuan-Fong Shih, Wake Forest University, U.S.A.


As consumers increasingly use debt and installment payments to finance durable goods, understanding of how financing decisions are made can allow marketers to better design financing schemes that will stimulate purchases.

In a typical financing scenario, the consumer makes payments for an agreed upon time period and in exchange uses the product and reaps the benefits that are derived from consumption. Research has shown that consumers prefer to match the cost stream associated with the financing payments with the benefit streams that accrue from using the product (Hirst, Joyce, and Schadewald 1994; Prelec and Loewenstein 1998). When unbalance between the two types of stream occur, people are less likely to choose financing as a method of payment. This has been one of the primary reasons for people’s hesitance for financing services such as vacations since the benefits terminate once the trip is over but the payments used for financing the trip continue (Hirst, Joyce, and Schadewald 1994).

First, we attempt to capture how consumers prefer to match the length of benefit streams with the length of cost streams (experiment 1). We specifically address this in the context of a widely used and accepted promotion, payment deferrals. Second, whereas prior research has found a linear pattern for mental depreciation of durable goods, we contest this and suggest a non-linear mental depreciation pattern for high-tech products (experiment 2). Third, past research has been solely focused on the temporal contiguity of costs and benefits thereby suggesting that as long as the benefit stream coincides and overlaps with the cost stream, consumers will be favorable towards financing (Hirst, Joyce, and Schadewald 1994). We build and extend this argument by asserting that it is not only the length of cost and benefit streams that are relevant but also the pattern of costs and benefits that is of utmost importance in determining consumer’s preference for financing (experiment 3). Thus, we tested the presence and validity of the matching between the benefit and payment streams, the alignment hypothesis, in a series of three experiments.

In three experiments, we confirmed the presence of the alignment hypothesis in consumer financing decisions. Experiment 1 confirmed consumer’s preference for temporal contiguity between the benefits accrued from using products with the payments resulting from using a financing scheme. In experiment 2, we examine the alignment hypothesis by testing for the possibility of non-linearity in the benefits that accrue from using high-tech products or more generally, products that become obsolete quickly over time. Our study found that durable products may have a different rate of mental depreciation. Products with a high newness premium such as computers have a kinked mental depreciation curve such that there is greater depreciation early in the product’s life than in the later parts. Products which provide stable benefits in its life cycle instead exhibit a linear depreciation curve. Finally, in experiment 3, we build on this non-linear benefit pattern to explicitly test our alignment hypothesis and find that consumers prefer to align their payment stream to their product’s mental depreciation pattern.


Hirst, D. Eric, Edward J. Joyce, and Michael S. Schadewald (1994), "Mental Accounting and Outcome Contiguity in Consumer-Borrowing Decisions," Organizational Behavior and Human Decision Processes, 58, 136-152.

Prelec, Drazan and George Loewenstein (1998), "The Red and the Black: Mental Accounting of Savings and Debt," Marketing Science, 17 (1), 4-28.



Seigyoung Auh, Brock University, Canada
Chuan-Fong Shih, Wake Forest University, U.S.A.


AP - Asia Pacific Advances in Consumer Research Volume 6 | 2005

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