Conspicuous Consumption and Within-Group Income Inequality

Abstract

Individuals engage in conspicuous consumption to signal their income to their own reference groups, defined in a fine manner by observable identifiers such as race, gender, education, and occupation. The more income inequality within a reference group, the less prior information concerning the income of an individual, and hence the more effective the conspicuous consumption signal. Therefore, within-group income inequality causes substitution from non-conspicuous consumption to conspicuous consumption. We find strong evidence supporting this prediction regarding aggregate conspicuous consumption for all income percentiles. Disaggregating into smaller consumption categories, most consumption items categorized by the previous literature as conspicuous and non-conspicuous using survey methods agrees with this prediction as well