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Signaling Status: The Impact of Relative Income on Household Consumption and Financial Decisions

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Abstract

This paper investigates the importance of status in household consumption and financial decisions using household data from the Survey of Consumer Finances (SCF) linked to neighborhood data in the American Community Survey (ACS). We find evidence that a household's income rank--its position in the income distribution relative to its close neighbors--is positively associated with its expenditures on high status cars, its level of indebtedness, as well as the riskiness of the household's portfolio. More aggregate county-level evidence based on a dataset of every new car sold in each county in the United States since 2002 also suggests that the signaling motive might be important. These results indicate that greater income heterogeneity might have large consequences for household consumption and portfolio decisions.

Suggested Citation

  • Jesse Bricker & Jacob Krimmel & Rodney Ramcharan, 2014. "Signaling Status: The Impact of Relative Income on Household Consumption and Financial Decisions," Finance and Economics Discussion Series 2014-76, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2014-76
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    Cited by:

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    2. Sommarat Chantarat & Atchana Lamsam & Krislert Samphantharak & Bhumjai Tangsawasdirat, 2020. "Household Debt and Delinquency over the Life Cycle," Asian Development Review, MIT Press, vol. 37(1), pages 61-92, March.
    3. Claborn, Kelly A. & Brooks, Jeremy S., 2019. "Can We Consume Less and Gain More? Environmental Efficiency of Well-being at the Individual Level," Ecological Economics, Elsevier, vol. 156(C), pages 110-120.
    4. Sumit Agarwal & Vyacheslav Mikhed & Barry Scholnick, 2016. "Does inequality cause financial distress? Evidence from lottery winners and neighboring bankruptcies," Working Papers 16-4, Federal Reserve Bank of Philadelphia.
    5. Banuri, Sheheryar & Nguyen, Ha, 2023. "Borrowing to keep up (with the Joneses): Inequality, debt, and conspicuous consumption," Journal of Economic Behavior & Organization, Elsevier, vol. 206(C), pages 222-242.
    6. Lukasz Walasek & Gordon D. A. Brown, 2016. "Income Inequality, Income, and Internet Searches for Status Goods: A Cross-National Study of the Association Between Inequality and Well-Being," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 129(3), pages 1001-1014, December.

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