Thy Neighbor’s Misfortune: Peer Effect on Consumption
65 Pages Posted: 19 May 2016 Last revised: 13 Nov 2017
Date Written: November 13, 2017
Using a large, representative sample of credit and debit card transactions in Singapore, we study the consumption response of individuals whose same-building neighbors experienced personal bankruptcy. The unique bankruptcy rules in Singapore suggest liquidity shocks drive personal bankruptcy and the bankrupts experience severe consumption decrease afterwards. Peers’ monthly card consumption decreases by 3.4 percent over the one-year post-bankruptcy period. We find no occupation concentration in the bankruptcy-hit buildings, no consumption decrease among individuals in immediately adjacent buildings, or for consumers with diminished post-event social ties with the bankrupt individual. Our findings imply a significant social multiplier effect of 0.8-1.2 times the original consumption shock. The response is more pronounced for consumers with greater interaction and is equally strong in the conspicuous and non-conspicuous goods.
Keywords: Peer Effect, Social Multiplier, Consumption, Spending, Bankruptcy, Debt, Credit Cards, Household Finance, Banks, Loans, Durable Goods, Discretionary Spending
JEL Classification: D12, D14, D91, E21, E51, E62, G21, H31
Suggested Citation: Suggested Citation