Conspicuous consumption and peer-group inequality: the role of preferences

Abstract

We develop a model that predicts changes in household consumption following a mean preserving increase in consumption inequality. The model allows for multiple peer-groups (a high-consumption (HC) group and a low-consumption (LC) group) as well different degrees of conspicuousness between the goods. We find that following a mean preserving increase in consumption inequality, a household with a constant level of income will increase its consumption of the more conspicuous good when it has preferences consistent with (i) ‘keeping up with the Joneses’ and a relatively stronger HC effect or (ii) ‘running away from the Joneses’ and a relatively stronger LC effect. Using U.S. consumer expenditure data from 1986 to 2002, we find tremendous heterogeneity in household preferences. While U.S. households consistently demonstrate ‘keeping up with the Joneses’, the relative strengths of HC and LC effects vary across racial sub-groups as well as across goods. Likewise, while expenditure on clothing, jewelry, personal care, etc., is generally more conspicuous than expenditure on healthcare, home furnishings, vehicle maintenance, etc., among the LC group, it is less conspicuous among the HC group with some heterogeneity by race. We conclude that heterogeneity in preferences is a likely explanation for the differences in the observed relationship between conspicuous spending and peer group inequality.