

ONE OF the perks of spending many years studying a quantitative subject: I have enough confidence with my intellect to admit, without embarrassment, I enjoy bad reality television. I recently watched the reunion special of The Real Housewives of New York City. This show chronicled the lives and exuberant consumption habits of five self-proclaimed New York socialites. A high point of the reunion special featured four of the women chiding the fifth for keeping her home unfinished, and potentially dangerous to her young children, while spending thousands of dollars on designer clothes to fuel her social aspirations.

Economic theory predicts we consume for our own benefit rather than to impress others, so why would otherwise rational people make such a choice? Erik Hurst, Kerwin Charles, and Nick Roussanov found many people view their consumption as a signal to others. Further, black and Hispanic Americans are more likely, after controlling for permanent income, to spend a greater share of their wealth on conspicuous forms of consumption such as automobiles, clothes, and jewellery. To fund this spending, they often forgo more beneficial goods such as health care, education, and future consumption, i.e. saving. They found the conspicuous consumption motive can explain as much as 50% of the Black/white wealth gap, after controlling for income.

Why does this behaviour seem to be more common for racial and ethnic minorities?

The authors believe it can be explained by income and social networks. Ethnic and racial groups tend to socialise and live together in the US. Humans compete with their peers for wealth and social status. Wealth is unobservable so visible expensive goods acts as a signal you have achieved status to your peers.

White Americans, on average, have more income and Messrs Hurst, Charles, and Roussanov found visible spending is less common in richer communities. That may be because, perversely, at a certain point conspicuous consumption becomes associated with being poor. Or, Ray Fisman suggests, it may be because communities with higher levels of income may also experience greater income disparity. The authors define a community as people of the same race living in the same state.

A poorer white person is more likely to find himself in richer community. If he can not compete economically he may simply opt out of the game. Some of the New York Housewives (all are white) have more money than the others, but they all have much more than I do. So while they go to benefits in designer gowns to one up each other, I sit at home and watch them on television in Target sweatpants.

Minorities often live clustered together with similar socio-economic backgrounds; this gives them a greater incentive to compete for wealth and status. They become more likely to signal their success with visible consumption.

The impact of income on the level of visible consumption appears to persist across minority groups. For example, richer Hispanic groups are less likely to use consumption as a signal than poor ones. It seems because minority communities tend to be poorer, they end up devoting more of their resources to conspicuous consumption. The richer your peers are, no matter your background, the less you spend on visible consumption.

Someone should tell the New York Housewives.