Price as a Signal of Wealth, Revisited

Abstract

This study revisits the classic wealth-signaling theory of prices. Using a four-dimensional panel data set of automobile rentals, we meet a series of identification challenges including multiplicity, endogeneity, and heterogeneity. We find that signaled wealth often reduces demand, contrary to prevailing wisdom. The finding calls for a reconsideration of strategies and policies that have regarded signaled wealth as a desirable trait of high prices.

Keywords: price, preference, wealth signaling, choice externality, identification