Forget empathy. The wealthy may simply feel less pressure to show off their status during economic downturns, new research suggests.
PROBLEM: The so-called budget effect is well-documented in a down economy. Consumers cut back on nonessentials and this increases their share of spending on basic goods and services like food and shelter. But why do unaffected wealthy consumers skimp on luxuries during lean times too?
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METHODOLOGY: Marketing professors Wagner A. Kamakura of Duke University and Rex Yuxing Du of the University of Houston argued that for products or services that are visible and nonessential, consumers draw value not only from consumption, but also from their 'positionality,' or the social status they convey. Using a model that allowed them to separate budget and positionality effects, they analyzed the nature of U.S. household spending for more than two decades.
RESULTS: As expected, the share of the budget devoted to nonessentials like jewelry and travel dropped when the economy contracted, while the portion devoted to essentials, including food, housing, and utilities, went up. Interestingly, the rich may not spend less on luxury goods out of empathy for those who are less well off. Perceiving a reduction in others' spending on positional goods, they appear to simply feel less pressure to spend on such items to maintain their status.
CONCLUSION: During an economic downturn, even people who are not directly affected spend less on goods and services that signal social status. Visible luxuries are hit twice because people in general have less money and those who still have it feel less compelled to show off.
SOURCE: The full study, "How Economic Contractions and Expansions Affect Expenditure Patterns," is published in the Journal of Consumer Research.
Image: Bobby Yip/Reuters.