(Photo credit: Anders V)Study: Consumers Keep Up -- or Down -- with the Joneses During Recession - Duke's Fuqua School of Business:It has long been a question as to why spending is reduced in a recession for many whose income seemingly has not fallen (or at least not enough to warrant income based cutbacks). Now we may have the answer thanks to Wagner Kamakura and Rex Du whose paper suggests that this reduction of spending is a result of those who are spending as a means of flaunting their wealth (i.e "Keeping up with the Joneses") don't need to spend as much to do so when the Joneses have been forced to cut their spending.
"Non-essential goods like jewelry, clothing and travel maintain their attractiveness regardless of the state of the economy," said Wagner Kamakura, marketing professor at Duke's Fuqua School of Business and lead author of the study. "But the positional value of non-essentials is reduced during recession.
"When households affected by recession spend less on positional goods, households not directly affected by recession -- even though their overall consumption budgets may remain constant -- can follow suit and still maintain their social status. Those households whose budgets are not significantly impacted by recession may choose to divert more money into savings.
a look-in to the paper itself which is forthcoming in the Journal of Consumer Behavior:
"' Our basic research question is: For any given level of consumption budget, how would a household’s expenditure pattern (i.e., category budget shares) differ, depending on whether the economy is in recession or not? Standard economic models would suggest that for the same amount of total expenditures, category budget shares would remain unchanged. A key assumption of these standard models is that the utilities a household derives from various commodities at different levels of expenditure are independent of economic conditions. For example, consumers should enjoy jewelry in a recession as much as they do in normal economic times.....in this study, we depart from the standard economic assumption, arguing that the utilities a household derives from various commodities could vary systematically, depending on whether the economy is in recession or not. We postulate that people care about their relative position in a society when it comes to expenditures in certain categories. In a recession, their desire to spend in these “positional” categories will decrease, because there is no longer a need to spend as much to maintain the same social standing when others have reduced their expenditures."
Wow, I wish I had thought of that!
That said, I would also suggest that at least some of the reduced spending may be explained, not so much by a drop in income, but by an increase in the variance of the income ("I have a job not, but my future now looks more uncertain so I better not spend so much.")
1 comment:
I think we're ignoring the obvious here. As someone whose income remained constant or went up during this recession, I cut back my spending because of the uncertainty of the economy. I was putting more into savings in case something happened to my income at a later date. (I knew I would kick myself if I spent $5K on a trip to Jamaica only to be laid off a few months later!)
I think this article is written by people who have too much education and too little common sense and obviously way too much time on their hands.
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