The desire to impress others by spending on such conspicuous items as phones, funerals and festivals can keep people locked in poverty, especially those with low levels of education. That is the central message of research by Professors Omer Moav and Zvika Neeman, published in the September 2012 issue of the Economic Journal.

Their study suggests that offering parents the opportunity to signal their wealth through investing in private education and other productive yet conspicuous outlets would help to break the cycle of poverty. This contrasts with standard policy prescriptions for improving a poor country’s human capital via increased public spending on education.

The researchers note that poor families around the world – those living on less than $2 a day – spend much of their income on goods that do not appear to alleviate poverty. For example, the average spending on festivals is as high as 15% of income in some regions of India. Similarly, South Africans spend on average a year’s income on an adult’s funeral, often financed by borrowing.

These consumption patterns are puzzling because they seem to come at a high cost for the poor. For example, they spend only 2-3% of their income on their children’s education, they do not eat well, they experience ill health and they are anxious to an extent that interferes with their sleep and work. They also fail to make trivial investments in their businesses and cannot avoid cutting back on meals when they suffer a temporary decline in income.

The researchers propose a novel explanation for these consumption patterns, interpreting them as conspicuous spending intended to provide a signal about unobserved income.

A New York Times article (‘Moonshine or the Kids’ by Nicholas Kristof, 22 May 2010) offered other examples of spending decisions that perpetuate poverty and which the researchers interpret as conspicuous consumption. One was the Obamza family from the Republic of the Congo.

The family were eight months behind on their $6 per month rent and in danger of being evicted; they had no mosquito nets even though they had already lost two of their eight children to malaria; and they could not afford the $2.50 per month tuition for each of their three school-age children. Yet Mr and Mrs Obamza spent $10 per month on mobile telephones and Mr Obamza drank several times a week at a village bar, spending about $12 per month.

The ruinous impact of conspicuous consumption on the lives of the poor is also reflected in a Tajikistani government policy. According to National Public Radio (16 February 2008), Tajikistan’s President, Imomali Rahmon, banned gold teeth, the use of mobile telephones in universities and large birthday parties.

Radio Free Europe (29 May 2007) reported that the President criticised wealthy citizens ‘for showing off their wealth by throwing elaborate parties and thereby setting a standard for others who try to appear wealthy by holding a large party despite having only modest incomes’. The President restricted the number of people and amount of food served at weddings to prevent Tajiks, 60% of whom live below the poverty line, from ‘using their life savings just to compete with their neighbours’.

Moav and Neeman propose that people care about their economic status and try to signal their income through conspicuous consumption. The analysis shows that if human capital is somewhat observable and correlated with income, then an unfortunate outcome driven by ‘signalling’ can emerge, in which poor individuals spend a large fraction of their income on conspicuous consumption.

In particular, individuals with high human capital have a recognisable earning ability – professional titles, degree certificates, prestigious jobs, etc. – and relatively little need to signal success. In contrast, those without certified accomplishments have a relatively stronger motivation to impress via conspicuous consumption.

As a result, the fraction of income allocated to conspicuous consumption can decline as the level of human capital rises – and the income allocated to savings and education can increase. Thus, the analysis predicts that among poor families with low levels of education, there will be low saving rates and low investment in the future – particularly in children’s education.

Savings Rates and Poverty: The Role of Conspicuous Consumption and Human Capital‘ by Omer Moav and Zvika Neeman is published in the September 2012 issue of the Economic Journal.

Media Coverage

Bloomberg The consumption choices of the poor may be doing little to lift them out of poverty.