EFFECT OF INCOME INEQUALITY ON HOUSEHOLDS' DESIRE TO LIVE BEYOND THEIR MEANS IN THE UNITED STATES

Abstract

This paper shows that, consistent with Veblen's signaling-by-consuming model, rising income inequality contributes to an increase in household conspicuous consumption. We use the Consumer Expenditures Survey (CEX) and state-level income inequality data across six different years (1994, 1995, 1998, 1999, 2002 and 2003) to estimate the impact of income inequality on conspicuous consumption at different points along the income distribution. The various goods and services consumed annually by households are divided into two categories, visible and invisible, based on their Vindex (Heffetz 2004), a measure ranking the visibility of consumer expenditures. We explore the varying effects of income inequality and provide evidence linking it with households' decisions to spend beyond their means in order to maintain their relative standing in society.