DP10468 Trickle-Down Consumption

Author(s): Marianne Bertrand, Adair Morse
Publication Date: March 2015
Keyword(s): consumption, income inequality, savings, status
JEL(s): D14
Programme Areas: Financial Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=10468

Using state-level variation over time in the top deciles of the income distribution, we observe that non-rich households consume a larger share of their current income when exposed to a higher top income and consumption levels. We argue that permanent income, wealth effects, and upward local price pressures cannot provide the sole explanation for this finding. Instead we show that the budget shares which non-rich households allocate to more visible goods and services rise with top income levels, consistent with status-maintaining explanations for our primary finding. Non-rich households exposed to higher top income levels self-report more financial duress; moreover, higher top income levels in a state are correlated with more personal bankruptcy filings. Non-rich households might have saved up to 3 percent more annually by the mid-2000s had incomes at the top grown at the same rate as median income since the early 1980s.