Social Norms, Status Spending and Household Debt: Evidence from Kyrgyzstan

Abstract

Development economists have two key paradigms concerning poverty and financial markets. One considers the poor in the developing world as operating in imperfect markets. Another view is that the poor are subject to constraints. The policy prescriptions stemming from these views would be improving market access and redistribution. We consider one important constraint the poor are facing: social norms which require spending on ceremonial activities. This paper adds to the literature by providing empirical evidence that having access to loans makes households spend more on ceremonies and with the higher ceremonial spending they increase the likelihood of debt thus creating a vicious circle which might keep households in poverty. Thus policies which are aimed at either removing market frictions or providing benefits to the poor will not have a desired effect. These measures have to be combined with reforms aimed at changing the existing institutions