Status Substitution and Conspicuous Consumption

This paper adapts ideas from social identity theory to set out a new framework for modelling conspicuous consumption. Notably, this approach can explain two stylised facts about conspicuous consumption that initially seem at odds with one another, and to date have required different families of models to explain each: (1) people consume more visible goods when their neighbours' incomes rise, but (2) consume less visible goods when incomes of those with the same race in a wider geographic area rise. The first fact is typically explained by ‘Keeping up with the Joneses' models, and the second by signalling models. Our model also explains related features of conspicuous consumption: that the rich are more sensitive to others' incomes than the poor, and that the effect of income inequality on consumption differs qualitatively across groups. Importantly, it explains this fourth stylised fact without falling back on differences in preferences across groups, as required in other models. In addition, our model delivers new testable predictions regarding the role of network structure and income inequality for conspicuous consumption.