Conspicuous consumption and income inequality

Abstract

The nature of conspicuous consumption can be understood by exploring the channels through which income inequality affects conspicuous consumption. We develop a simple model where comparison references are determined through social interactions and demonstrate: (1) a negative relationship between income inequality and the average level of conspicuous consumption; and (2) a positive relationship between income inequality and the variance of conspicuous consumption. We empirically test these hypotheses using US state-level panel data. We find that a one-standard-deviation increase in the Gini coefficient decreases households' conspicuous expenditure by about 5%. We also find that higher income inequality increases between-household inequality in conspicuous expenditure.