The effect of culture on consumption: A behavioral approach

Abstract

This paper studies the connection between culture and consumption behavior. Linkages are drawn from manifestations of culture, involving both political style and personal preferences, to the key character traits of self-restraint and future focus. These character traits are then related to consumption behavior through a quasi-hyperbolic discounting model to generate hypotheses. Panel data for 89 countries and territories for the period 1999–2018 are used to test these hypotheses. With respect to political style, the results indicate that corruption, non-transparency in the public sector, and government intervention in banking reduce a country’s consumption. With respect to personal attributes, a long-term view is found to lower consumption and individualism to raise it. This study is motivated by a concern that for China in particular, stronger consumption will be needed to sustain long-term growth. Of particular relevance to the Chinese case, we find that countries with Confucian traditions have national consumption rates that are lower than global norms by more than 10 percentage points as a share of GDP. Even against this backdrop, however, we suggest there is scope to boost consumption with policies that fight corruption, promote transparency, reduce government intervention in the economy, and foster a stronger sense of the individual.