Keeping up with the Joneses: Social Status and Wealth Inequality in a Leveraged Asset Market

Abstract

We hypothesize that growing wealth inequality has exacerbated leveraged asset bubbles in the wealthiest nations over the last several decades through a “keeping up with the Joneses” effect. Rising inequality strengthens the desire of households to improve their social status by owning assets such as homes demanded by those with wealth. Given easy access to credit, relatively low-wealth individuals use leverage to bid up asset prices. We test this theory within the popular asset market experiment of Smith, Suchanek, and Williams (1988) where we combine the option to borrow with treatments for wealth inequality and social status. We find that the social status effect indeed leads to asset overpricing, and the impact is the biggest when combining social status with wealth inequality. On the other hand, wealth inequality alone does not lead to greater asset bubbles.