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Keeping up with the Joneses: conspicuous consumption, income inequality and Americans' addiction to debt

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The availability of credit cards and financing options that enable consumers to pay for consumption with debt has dramatically increased over the past two decades. At the same time, household debt relative to disposable income has surged, forcing more and more households into filing for personal bankruptcy. This trend seems puzzling since it has occurred under very favorable economic conditions, with strong economic growth and record-low unemployment rates, which is inconsistent with the standard economic model of consumer borrowing. Existing research in marketing on consumer borrowing decisions tends to focus on credit card availability and biases in consumer decision-making. While recognizing that the rapid increase in credit card debt has played a role, it accounts for only about 10% of total household debt. In contrast to existing explanations, the authors present a theory of consumer borrowing that is based on rational (i.e., utility maximizing) consumer behavior and applies to all types of household debt. Building on the theory of social interactions, they posit that consumers use conspicuous consumption to maintain or improve their social standing within their community, which increases their chances of being among the economic 'winners.' In this situation, rising income inequality leads to higher levels of debt, all else equal, through the social interaction effect of conspicuous consumption. Using quarterly US data for 1980-2000, the authors find strong support for the hypothesized effect of income inequality for all types of household debt. Moreover, the effect is economically highly relevant. For example, for consumer (i.e., non-mortgage) debt the effect of income inequality exceeds the effect of rising asset values or falling interest rates for the period of investigation.

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en

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application/pdf

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http://flora.insead.edu/fichiersti_wp/inseadwp2002/2002-84.pdf

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Copyright INSEAD. All rights reserved