Visible Inequality, Status Competition and Conspicuous Consumption : Evidence from India

If individuals care about their status, defined as their rank in the distribution of conspicuous consumption, a fall in the level of visible inequality is likely to cause them to spend more on conspicuous goods due to increased status competition. I examine this hypothesis using micro data from rural India. Employing an identification strategy based on instrumental variables, I find robust evidence that visible inequality has a negative and significant impact on household conspicuous consumption. Further, my results indicate that the increase in conspicuous expenditure in response to a fall in visible inequality is diverted from education spending which is perceived to have positive social externalities. This suggests that traditional redistributive policies that seek to reduce the level of economic inequality, by encouraging ‘wasteful' spending of households, might have adverse welfare consequences