Signalling to whom? Conspicuous spending and the local density of the social group income distribution

We empirically evaluate two competing explanations about how the dispersion of income within social groups affects household spending on visible goods. Using South African household expenditure data, we find evidence that precisely the reverse of the effect predicted by Charles et al. (2009) takes place in that rich households tend to reduce, rather than increase, spending on visible goods as the dispersion of social group income increases. Our results instead support rank-based models of status competition (e.g. Hopkins and Kornienko, 2004) since the number of within-group peers who possess a similar income level is found to be positively correlated with household spending on visible goods. Moreover, we find that the effect of this local density tends to be stronger in the tail regions of the distribution and performs better than other proxies for the overall income distribution used in recent studies (Brown et al., 2011). How the range of visible goods used to signal wealth expands as household income grows is also explored.