Study of the Day: Why the Rich Skimp During a Recession Too

More

Forget empathy. The wealthy may simply feel less pressure to show off their status during economic downturns, new research suggests.

main Bobby Yip : Reuters RTR2N82K.jpg

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?

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.

Jump to comments
Presented by

Hans Villarica writes for and produces The Atlantic's Health channel. His work has appeared in TIME, People Asia, and Fast Company.

Get Today's Top Stories in Your Inbox (preview)

'Stop Telling Women to Smile'

An artist's campaign to end sexual harassment on the streets of NYC.


Elsewhere on the web

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register. blog comments powered by Disqus

Video

Where Time Comes From

The clocks that coordinate your cellphone, GPS, and more

Video

Computer Vision Syndrome and You

Save your eyes. Take breaks.

Video

What Happens in 60 Seconds

Quantifying human activity around the world

Writers

Up
Down

More in Health

Just In