Conspicuous Consumption, Human Capital and Poverty
University of Warwick - Department of Economics; Centre for Economic Policy Research (CEPR)
Tel Aviv University - Eitan Berglas School of Economics; Boston University - Department of Economics
CEPR Discussion Paper No. DP6864
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.
Number of Pages in PDF File: 27
Keywords: Conspicuous Consumption, Human Capital, Poverty
JEL Classification: D91, O11, O12, O15
Date posted: June 17, 2008
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