Quantitative Marketing and Economics

, Volume 3, Issue 2, pp 145–173 | Cite as

Keeping Up With the Joneses: Analyzing the Effect of Income Inequality on Consumer Borrowing

Article

Abstract

Household debt relative to disposable income increased from 60% in 1980 to 104% at the end of 2003. ‘Buying on credit’ has become so popular that an increasing number of firms generate more profit from financing than from selling their products. In this paper, we show that rising income inequality has substantially contributed to increased consumer borrowing. Income inequality affects all components of total household debt, but the impact is strongest on non-revolving debt (installment loans), which is used to finance the purchase of consumer durables. We argue and provide evidence that the income inequality effect on consumer borrowing is a result of conspicuous consumption. Rising income inequality has forced households with smaller income gains to use debt to keep up their consumption level relative to households with larger income gains.

Key Words

debt puzzle consumer credit income inequality conspicuous consumption 

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Aaker, J. (1997). “Dimensions of Brand Personality.” Journal of Marketing Research 34(August), 347–357.Google Scholar
  2. Aizcorbe, A.M., A.B. Kennickell, and K.B. Moore. (2003). “Recent Changes in U.S. Family Finances: Evidence from the 1998 and 2001 Survey of Consumer Finances.” Federal Reserve Bulletin.Google Scholar
  3. Ando, A. and F. Modigliani. (1963). “The “Life Cycle” Hypothesis of Saving: Aggregate Implications and Tests.” The American Economic Review 53(1), 55–84.Google Scholar
  4. Ausubel, L.M. (1991). “The Failure of Competition in the Credit Card Market.” The American Economic Review 81(March), 50–81.Google Scholar
  5. Bagwell, L.S. and B. Douglas Bernheim. (1996). “Veblen Effects in the Theory of Conspicuous Consumption.” American Economic Review 86(3), 349–373.Google Scholar
  6. Barnes, S. and G. Young. (2003). “The Rise in US Household Debt: Assessing its Causes and Sustainability.” Bank of England Working paper no. 206.}Google Scholar
  7. Becker, G.S. (1974). “A Theory of Social Interactions.” Journal of Political Economy 82(6), 1063–1093.CrossRefGoogle Scholar
  8. Becker, G.S., M. Grossman, and K.M. Murphy. (1994). “An Empirical Analysis of Cigarette Addiction.” The American Economic Review 84(3), 396–418.Google Scholar
  9. Bennett, P., R. Peach, and S. Peristiani. (1998). “Structural Change in the Mortgage Market and the Propensity to Refinance.” Federal Reserve Bank of New York Staff Reports 45.Google Scholar
  10. Champernowne, D.G. and F.A. Cowell. (1998). {Economic Inequality and Income Distribution}. Cambridge. U.K.: Cambridge University Press.Google Scholar
  11. Debelle, G. (2004). “Macroeconomic Implications of Rising Household Debt.” Bank of International Settlements Working Paper 153}.Google Scholar
  12. Dynan, K.E., J. Skinner, and S.P. Zeldes. (2004). “Do the Rich Save More?” Journal of Political Economy 112(21), 397–444.CrossRefGoogle Scholar
  13. Enders, W. (1995). Applied Econometric Time Series. New York, NY: John Wiley & Sons, Inc.Google Scholar
  14. Fay, S., E. Hurst, and M. White. (2002). “The Household Bankruptcy Decision.” The American Economic Review 92(3), 706–718.CrossRefGoogle Scholar
  15. Feinberg, R.A. (1986). “Credit Cards as Spending Facilitating Stimuli: A Conditioning Interpretation.” Journal of Consumer Research 13(3), 348–356.CrossRefGoogle Scholar
  16. Frank R.H. (1985). “The Demand for Unobservable and Other Nonpositional Goods.” American Economic Review 75(March), 101–116.Google Scholar
  17. Frank R.H. and P.J. Cook. (1995). The Winner-Take-All Society. New York, NY: Penguin.Google Scholar
  18. Friedman, M.F. (1957). A Theory of the Consumption Function. Princeton, NJ: Princeton University Press.Google Scholar
  19. Gaba, A. and A. Kalra. (1999). “Risk Behavior in Response to Quotas and Contests.” Marketing Science 18(3), 417–434.Google Scholar
  20. Gottschalk, P. (1997). “Inequality, Income Growth, and Mobility: The Basic Facts.” Journal of Economic Perspectives 11(Spring), 21–40.Google Scholar
  21. Hall, R. (1978). “Stochastic Implications of the Life-Cycle Permanent Income Hypothesis: Theory and Evidence.” Journal of Political Economy 96, 971–987.Google Scholar
  22. Hirsch, F. (1976). Social Limits to Growth. Cambridge, MA: Harvard University Press.Google Scholar
  23. Katz, L.F. and D.H. Autor. (1999). “Changes in the Wage Structure and Earnings Inequality.” In O. Ashenfelter and D. Card (eds.), Handbook of Labor Economics, Vol. 3a, Chapter 26. Elsevier: Netherlands.Google Scholar
  24. Kowalewski, K. (2000). “Personal Bankruptcy: A Literature Review.” Congressional Budget Office report}.Google Scholar
  25. Krueger D. and F. Perri. (2002). “Does Income Inequality Lead to Consumption Inequality? Evidence and Theory.” NBER Working Papers 9202}.Google Scholar
  26. Laibson, D., A. Repetto, and J. Tobacman. (2000). “A Debt Puzzle.” NBER Working Paper 7879}.Google Scholar
  27. Levy, S.J. (1959). “Symbols for Sale.” Harvard Business Review 37(4), 117–124.Google Scholar
  28. Maki, D.M. (2000). “The Growth of Consumer Credit and the Household Debt Service Burden.” Federal Reserve Board Finance and Economics Discussion Series 2000-12.Google Scholar
  29. Maki, D.M. and M.G. Palumbo. (2001). “Disentangling the Wealth Effect: A Cohort Analysis of Household Savings in the 1990s.” Federal Reserve Board Finance and Economics Discussion Series}, 2001-21m.Google Scholar
  30. Morgan, D.P. and I. Toll. (1997). “Bad Debt Rising.” Current Issues in Economics and Finance 3(4), 1–6.Google Scholar
  31. Prelec, D. and G. Loewenstein. (1998). “The Red and the Black: Mental Accounting of Savings and Debt.” Marketing Science 17(1), 4–28.Google Scholar
  32. Rae, J. (1834). The Sociological Theory of Capital. London: McMillan.Google Scholar
  33. Ryscavage, P. (1999). Income Inequality in America. Armonk, NY: M. E. Sharpe.Google Scholar
  34. Soloman, M.R. (1983). “The Role of Products as Social Stimuli.” Journal of Consumer Research 10(3), 319–329.CrossRefGoogle Scholar
  35. Soman, D. (2000). “Effects of Payment Mechanism on Spending Behavior: The Role of Rehearsal and Immediacy of Payments.” Journal of Consumer Research 27(March), 460–474.CrossRefGoogle Scholar
  36. Soman, D. and A. Cheema. (2002). “The Effect of Credit on Spending Decisions: The Role of Credit Limit and Credibility.” Marketing Science 21(Winter), 32–53.CrossRefGoogle Scholar
  37. Stires, D. (2003). “Is Your Store a Bank in Drag?” {Fortune}, March 17, 38.Google Scholar
  38. Sullivan, T.A., E. Warren, and J.L. Westbrook. (2000). The Fragile Middle Class: Americans in Debt. New Haven: Yale University Press.Google Scholar
  39. Thaler, R. and H.M. Shefrin. (1981). “An Economic Theory of Self Control.” Journal of Political Economy 89(2), 392–406.CrossRefGoogle Scholar
  40. Veblen, T. (1899). The Theory of the Leisure Class. New York: Modern Library.Google Scholar
  41. Welch, F. (1999). “In Defense of Inequality.” American Economic Review 89(May), 1–17.Google Scholar
  42. Wertenbroch, K. (1998). “Consumption Self-Control by Rationing Purchase Quantities of Virtue and Vice.” Marketing Science 17(4), 317–337.Google Scholar

Copyright information

© Springer Science + Business Media, Inc. 2005

Authors and Affiliations

  1. 1.INSEADFontainebleauFrance
  2. 2.Huron Consulting Group in Chicago

Personalised recommendations