Wednesday, 24 September 2014

The Impact of Relative Income on Household Consumption and Financial Decisions

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.

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