Tuesday, 30 September 2014

Status update

Our own golden boy Graeme Hart has been in the news a bit lately. First his old super yacht (left) was put up for sale, then he launched the new one and then yesterday the Royal NZ Herald printed this lovely piece about how much better he is than other billionaries (younger, richer etc). I don't know much about the guy, but he seems like a real risk-taking entrepreneur to me. Most people who make $100m don't go straight out and borrow several times that much to sink into another company. 

Against that background, this paper(pdf) from the US Federal Reserve caught my eye. The authors studied the spending patterns of households and linked them with their neighbourhood income distribution. It turns out that people with incomes towards the top end of their local income distribution spend a lot more on high status cars, are more indebted and have riskier portfolios. 

So what? This is just how entrepreneurs behave, right? Well not really, because it turns out that this effect varies across neighbourhoods. The authors report 
a large positive association between income inequality inside a county and the fraction of high status cars sold. And consistent with the household level results, we also find higher levels of consumer leverage in more unequal counties.
So income inequality does seem to result in conspicuous consumption as Veblen argued in 1899 after observing the last gilded age.


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