Working Paper: CEPR ID: DP6864
Authors: Omer Moav; Zvika Neeman
Abstract: Poor families around the world spend a large fraction of their income on consumption of goods that appear to be useless in alleviating poverty, while saving at very low rates and neglecting investment in health and education. Such consumption patterns seem to be related to the persistence of poverty. We offer an explanation for this observation, based on a trade-off between conspicuous consumption and human capital as signals for unobserved income, under the assumption that individuals care about their status. Despite homothetic preferences, this trade-off gives rise to a convex saving function, which can help explain the persistence of poverty.
Keywords: conspicuous consumption; human capital; poverty
JEL Codes: D91; O11; O12; O15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| conspicuous consumption (E21) | unobserved income (J46) |
| low human capital (J24) | conspicuous consumption (E21) |
| conspicuous consumption (E21) | persistence of poverty (I32) |
| observable human capital (J24) | less conspicuous consumption (D19) |
| low education and income (I24) | low income steady state (I32) |
| above certain income threshold (H24) | growth (O40) |
| low human capital (J24) | larger fraction of income on conspicuous consumption (D12) |