DP6864 Conspicuous Consumption, Human Capital and Poverty

Author(s): Omer Moav, Zvika Neeman
Publication Date: June 2008
Keyword(s): Conspicuous Consumption, Human Capital, Poverty
JEL(s): D91, O11, O12, O15
Programme Areas: International Macroeconomics, Public Economics, Development Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=6864

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.