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Saving Rates and Poverty: The Role of Conspicuous Consumption and Human Capital

Authors


  •  Corresponding author: Omer Moav, Department of Economics, Hebrew University of Jerusalem, Mt. Scopus, Jerusalem 91905, Israel. E-mail: omer.moav@huji.ac.il

  • The authors are grateful for comments from participants at seminars in ANU, Auckland, Boston University, Brown, City University London, Harvard/MIT, Hebrew University of Jerusalem, Helsinki Center of Economic Research, Royal Holloway University of London, University of Bristol, University of Copenhagen and Universitat Zurich, as well as conference participants at SMYE 2008, Lille; ESSIM, Tarragona 2008; Intergenerational Economic Mobility, Edinburgh, June 2008; Economics of Education and Education Policy in Europe, Amsterdam, October 2008; NBER Summer Institute 2009; EEA-ESEM, Barcelona 2009; Israeli Economic Association Meetings, June 2010; Behavioral Economics, The Yoram Ben-Porath Fund, Jerusalem, June 2010, The IDC Workshop, Herzelia, December 2010. Abhijit Banerjee, Alexander Danzer, Raquel Fernandez, Oded Galor, Frederic Jouneau, Johan Lagerlof, Victor Lavy, Joram Mayshar, Dilip Mookherjee, Yona Rubinstein, Avichai Snir, David Weil and Itzhak Zilcha all provided useful comments. The authors are grateful to Diana Egerton-Warburton for many valuable comments and discussions.

Abstract

Poor families around the world spend a large fraction of their income consuming goods that do not appear to alleviate poverty, while saving at low rates. We suggest that individuals care about economic status and interpret this behaviour as conspicuous consumption intended to provide a signal about unobserved income. We show that if human capital is observable and correlated with income, then a signalling equilibrium in which poor individuals tend to spend a large fraction of their income on conspicuous consumption can emerge. This equilibrium gives rise to an increasing marginal propensity to save that might generate a poverty trap.

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