LAHORE -In the third online Applied Development Economics (ADE) seminar hosted by the Lahore School of Economics on 21st July, Dr Sheheryar Banuri (Associate Professor, University of East Anglia, UK) discussed findings from a study conducted by Dr Banuri with colleagues from the World Bank. In a clean lab environment, he shows that individuals still engage in (costly) consumption to signal status, that access to credit exacerbates inequality by reducing the income share of the poorest.

The issue of conspicuous consumption; i.e. the purchase of luxury goods and services for the purpose of attaining or displaying status and economic power is of extreme relevance for developed and developing countries alike; since the mid-1990s, there has been a steady growth in the market for luxury goods (for instance on cars, hospitality, experiences etc.). Asia accounts for 65% of the consumption in the global luxury market, with a large bulk of it attributable to China and Japan. Wedding celebrations are also relevant in this context; they classify as a form of conspicuous consumption that signals the family’s social status to the community where it is resident.

Dr Banuri designed a lab experiment to understand why consumption of luxury items has been increasing overtime and how borrowing affects consumption, status-seeking and inequality. To answer these questions, Dr Banuri varied 3 dimensions in the experiment: whether peers can observe an individual’s expenditure, whether an individual’s money is earned through effort or received as an endowment and whether an individual has access to credit. His study provides 3 important insights about spending and human behaviour. Firstly, individuals substantially increase luxury consumption spending when it can be observed by their peers and hence signals status. Secondly, individuals also significantly increase loan taking when their consumption is conspicuous. Finally, the increase in loan taking is primarily driven by the poorest – individuals from the lowest income strata borrow most to keep up with others. All in all these findings imply that access to credit can exacerbate inequality between the rich and the poor rather than reducing it.