Signaling Status: The Impact of Relative Income on Household Consumption and Financial Decisions

Abstract

This paper investigates the importance of status in household consumption and credit decisions using data from the Survey of Consumer Finances linked to tract-level data in the American Community Survey. We find that relatively richer households in the census tract use more debt and spend more on high-status cars. Also, county-level evidence shows that the consumption of high-status cars is higher in more unequal counties. These results suggest that greater income heterogeneity might shape household consumption and credit decisions, as relatively richer households signal their higher status to their neighbors through the consumption of visible status goods. This paper was accepted by Tomasz Piskorski, finance.