Inequality, Relative Deprivation and Financial Distress - Evidence from Swedish Register Data

Abstract

Several studies have linked rising insolvency rates to increasing inequality and argued that this might be explained by individuals' desire to ``Keep up with the Joneses". Using unique administrative register data on individual insolvencies in Sweden, I test whether the probability to become insolvent is related to one’s income distance relative to peers. Identification relies on area fixed effects, an extensive set of background characteristics and varying the definition of relevant reference groups. I find that higher inequality increases the individual's probability to become insolvent and that this effect is mostly driven by men.

Keywords: Inequality, Insolvency, Bankruptcy, Financial distress, Social interaction

JEL Classification: D14, D31, D63, D91, E21