Semi-Daily Journal Archive

The Blogspot archive of the weblog of J. Bradford DeLong, Professor of Economics and Chair of the PEIS major at U.C. Berkeley, a Research Associate of the National Bureau of Economic Research, and former Deputy Assistant Secretary of the U.S. Treasury.

Monday, September 04, 2006

Alan Krueger Channels Ori Heffetz...

Ori Heffetz's work has some empirical implications for the spite-vs-envy question:

Untitled Document: Doctoral Thesis Says Rich People Spend More on Conspicuous Things: By ALAN B. KRUEGER: Published: January 6, 2005: LONG before Thorstein Veblen coined the term ''conspicuous consumption,'' economists from Adam Smith to Karl Marx had argued that people choose to buy some goods because of what those goods reveal about their standing in society, not because of any intrinsic enjoyment they get from the purchase.

Yet conspicuous consumption remained mainly a theoretical curiosity.... Now Ori Heffetz, a doctoral student in economics at Princeton University, has developed the first broad-gauged index of product visibility. Sure enough, he finds in his thesis that conspicuous items make up a greater share of the consumption budget in wealthier families.

The idea of conspicuous consumption is intuitive. A Timex watch, for example, tells time about as well as a Rolex, but the particular watch you wear tells a lot about your purchasing power and personality. A major motivation for buying an extravagant watch is to signal to others that the consumer has ''made it,'' a point not lost on advertisers. In Veblen's view, the wealthy engage in conspicuous consumption to advertise their wealth.... Because conspicuous consumption makes others feel less successful, some economists have argued that society would be better off if a high tax rate were applied to goods that are the object of conspicuous consumption.

It is unclear, however, whether conspicuous consumption is a motivation underlying the purchase of many products or just a few. Furthermore, products that are conspicuous may nonetheless be consumed for their intrinsic value.... To determine whether conspicuous consumption is a rarity deserving little attention or central to understanding what people buy, it is necessary to have a measure of the extent to which a good is conspicuous.

Mr. Heffetz measured the visibility of various products by conducting a telephone survey.... The index of visibility, or ''vindex,'' is the average score for how long it would take to notice that the consumer spent more than average on a product. The logic is simple: visibility is a cultural as well as a physical property. If neighbors talk about their expenditures on some goods, then they are more conspicuous than otherwise. The more conspicuous a product, the sooner it is noticed.

The visibility ranking that resulted from the survey is quite sensible. Cigarettes, clothing, cars and jewelry are the most visible products, while underwear, home insurance, life insurance and car insurance are the least. An implication of the theory of conspicuous consumption is that families spend relatively more on conspicuous goods as their incomes rise....

Mr. Heffetz estimated the relationship between the amount spent on each of 29 products and a household's income... the higher the visibility of a good, the more likely it is to be a luxury item....

The relationship is far from perfect, however. Cigarette consumption is greater among lower-income households than among higher-income ones, yet cigarettes are the most noticeable product of all... visibility accounts for 12 percent of the way in which income relates to consumption across products. Interestingly, the effect of visibility on consumption applies only to the richest half of families, for whom the visibility index accounts for 20 percent of the way additional income is spent on various products...

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