Visible Consumption, Income Inequality and Social Comparisons. Evidence from Four Latin American Countries

Abstract

Increased conspicuous consumption motivated by status-seeking behavior can undermine the gains in well-being derived from economic growth. Using expenditure surveys from Argentina, Brazil, Mexico and Uruguay, we assess visible consumption motivated by status seeking behaviour, analyzing different hypotheses about the role of externalities driven by social comparisons and income inequality. Specifically, we provide evidence for the relevance of different reference groups, assessing comparisons with richer (Veblen effects), poorer and similar profile groups (Duesenberry effects). We show that individuals are affected by multiple reference groups. Regarding between-group inequality, we find that individuals mainly seek to differentiate themselves from poorer groups, rather than imitating richer ones. In all cases, average reference group income of similar profile individuals is negatively related to visible consumption. Meanwhile, within-reference group responses are relevant in Argentina, Brazil and Mexico: increased visible goods consumption is associated with larger relative income gaps. In Argentina and Brazil, the sensitivity of visible goods expenditures to income is higher among households located above the reference threshold, which is consistent, again, with more affluent households trying to signal status by differentiating themselves from the most deprived group members. Meanwhile, in the case of Mexico, there is a symmetric response.