Tuesday, September 05, 2006

Conspicuous Consumption

The introduction to this paper by Ori Heffetz nicely expresses much of what drew me to social economics:
We all live in society and depend on each other for achieving most of our personal goals. These clearly include all goals that are directly related to our place in society and are only meaningful in a social context. For most of us, however, even mere physical survival depends on our ability to function in a social setting. We neither can nor want to live away from society.

Our ability to function in a social setting is in turn affected by what others think about us. And since others are unlikely to have perfect information about us, they are constantly watching us, updating their opinions and beliefs about who we are. Consequently, every aspect of our behavior that is observable by society may be interpreted as a signal.

In the signaling game we call life, when deciding upon a course of action, we consider not only the direct effects of our choice on our welfare, but also the indirect (or social ) effects resulting from society observing our choice. Balancing these two effects, we may choose actions that are suboptimal in their direct effects, but, considering their value as a signal, are overall optimal (for the decision-making individual).

In the socio-cultural context most familiar to us—that of a consumer society with a consumer culture—many of the choices we make and the actions we take are consumption related. Indeed, consumption is so pervasive in our lives that both in everyday conversation and in the academic economics literature, individuals are often simply referred to as consumers. And as consumers, an important channel through which we can send signals to society is our consumption behavior. The main idea behind this paper is that, as some consumer expenditures are more visible to society than others, a “signaling by consuming” model might help explain consumer expenditure patterns. Using such a model, we derive empirical predictions regarding total expenditure elasticities of demand, and we show that these depend on the visibility (or non-visibility) of the goods consumed. We construct a survey-based measure of the relative visibility of different consumption categories, and we apply it to explore how well our predictions fare with available data on household consumption. We find mixed but suggestive evidence that our survey-based measure could predict up to 20 percent of observed variation in elasticities across consumption categories.

Alan Krueger provides a non-technical summary of the article here. (h/t Brad Delong)

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