Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/307596 
Year of Publication: 
2024
Series/Report no.: 
Working Paper Series No. 81
Publisher: 
University of Waterloo, Canadian Labour Economics Forum (CLEF), Waterloo
Abstract: 
We document a significant effect of visible inequality on household spending in the United States from 2010 to 2018, but we do not find a comparable effect before the Great Recession. Our proposed definition of visible inequality refers to differences across households in their expenditures on highly noticeable consumption categories, including clothing, personal care, food away from home, and vehicles. Our empirical strategy exploits robust implications of a simple intertemporal model of conspicuous consumption, where a household's reference group consists of others in the same age group. Household spending is influenced by the distribution of permanent incomes within age groups, and visible inequality serves as a proxy for permanent income inequality. Our findings indicate that consumption externalities significantly distort household spending, which could have been up to 25 percent lower without these distortions. We hypothesize that low interest rates and social media contribute to these effects.
Subjects: 
visible inequality
relative consumption
permanent income inequality
JEL: 
D1
E21
Document Type: 
Working Paper

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