Positional consumption and the role of reference groups. Evidence from Latin America.

Gorga, Rodrigo; Leites, Martin; Vigorito, Andrea; Vigorito, Andrea (2014). 'Positional consumption and the role of reference groups. Evidence from Latin America.' Paper presented at the annual conference of the HDCA, 2-5 September 2014, Athens, Greece.

The aim of this paper is to analyze the empirical determinants of positional consumption, with emphasis on the role of the peer group on consumption decisions. In Veblen´s seminal work, conspicuous consumption has been defined as that consumption that is carried out in order to emulate the patters of high income strata (the leisure class) and is highly motivated by the search of economic and social status. Using national income and expenditure surveys micro-data, we study the cases of Argentina, Brazil, Mexico and Uruguay, as the four countries present significant differences in terms of ethnicity, inequality and spatial distribution of the population.

Consumption has been studied to a lower extent in Latin America both in economics and from the capabilities approach perspective. The fast economic growth the region has been experiencing in recent times poses the question on to which extent increased income has been translated into valuable achievements that enhance human development or it has fostered the consumption of positional goods.

Recent research on positional goods highlights the role of peer groups as a key determinant and highlights the fact that in many cases the more deprived populations are exposed to these behaviours (Charles et al, 2009; Chai and  Kaus, 2012).

To operationalize positional goods, we follow the classification proposed by Heffetz (2011) and consider the following expenditure groups: personal care, garments, jewelry and watches and cars. We estimate Engel curves including demographic and socio-economic variables and different specifications on the group effect (average income of the reference group, inequality within the reference group, distance to the mean within the group). Reference groups are defined on the basis of regional variables, age group and schooling of the household head.

Our findings show that social interactions have an effect on positional consumption, although they highly depend on the way in which the income of the reference group modelization.

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