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A blog about economics in the South Caucasus.

The Economics of Boasting


WHO BOASTS, AND WHY?

As argued by Omer Moav and Zvika Neeman in a 2012 paper (Moav taught at ISET in the past), boasting is a way to pretend that one has hidden income (“Saving Rates and Poverty: The Role of Conspicuous Consumption and Human Capital”, Economic Journal 122, pp. 933-956). While people may have a rough idea of the incomes of their neighbors, colleagues, friends, and other people they interact with, they usually do not know exactly how much they make. Hence, there is some wiggle room for speculation, and if one sees a colleague coming to work with a Bentley, people will update their beliefs about his or her financial potency.

But why do humans want to appear richer than they actually are? Evidence points at an evolutionary advantage, as command over resources seems to contribute to the sexual attractiveness of a person (in particular of males, who, for evolutionary reasons not to be discussed here, compete more fiercely for mating partners than females). It has been shown, for example, that the relationship status is a reliable predictor for the extent of a man’s conspicuous consumption – single men buy more expensive smartphones and cars than those who are married (e.g. Hennighausen and Schwab (2014): “Relationship Status Moderates Men’s Conspicuous Consumption of Smartphones”, Letters on Evolutionary Behavioral Science 5, pp. 13-16). Like male peacocks, whose lavish plumage indicates to females that their reproductive resources are so abundant that they can afford to have highly visible (and therefore risky), resource-intensive, and even obstructive feather coats, a human male who buys a Rolex shows to human females that he is so rich that he can afford to buy a watch for several thousand dollars which essentially yields the same utility as a $20 watch.

Paradoxically, conspicuous consumption seems to be more frequent in poorer societies. Moav and Neeman accumulate lots of evidence for this (detailed sources can be found in their paper): median spending on festivals comprises about 10-15% of annual income in rural India, and Black households in South Africa spend on average a year’s income on an adult’s funeral. At the same time, they typically spend less than 1% of their income on less transparent forms of entertainment like movie theatres. A New York Times article describes the case of a poor Indian farmer who sold his land for $109,000 and then rented a helicopter for $8,327 to fly his son two miles to his wedding party.

The explanation given by Charles, Hurst, and Roussanov (2009) is that conspicuous consumption is more effective in a society of poor people (“Conspicuous Consumption and Race”, Quarterly Journal of Economics 124, pp. 425-67). Their argument is threefold. Firstly, by the law of supply and demand, an attractive trait is more precious on the mating market the scarcer it is. “Hidden income” is therefore more attractive when most people are poor. Secondly, revealing that one is rich is more of a surprise in a poor society, and hence the impact on one’s reputation is more significant (if everybody already assumed that one was rich, buying a Porsche does not really make a difference). Thirdly, in a rich society it is much more expensive to impress others. When upper class cars are ubiquitous, as it is the case in some European countries like Luxembourg and Switzerland, then one needs to go for a Rolls Royce or Bentley to really impress. In a low-income country like Georgia, on the other hand, a plain Toyota Land Cruiser or a BMW X6 will do the job.


IS IT ECONOMICALLY DETRIMENTAL?

On the surface, one might think that a society of posers is beneficial for the economy. Doesn’t it boost the demand for expensive smartphones, watches, and cars?

Moav and Neeman show that the issue is more complicated, and that a veritable poverty trap can arise from conspicuous consumption. The first problem is that conspicuous consumption competes with more useful expenditures, say, like saving for one’s retirement or the education of children: “The very poor spend only 2-3% of their income on their children’s education, do not eat well, experience ill health, and report that they are worried and anxious to an extent that interferes with their sleep and work. In many cases, they fail to make trivial investments in their business and save so little that they cannot avoid cutting back on meals when they suffer a temporary decline in income.”

The second problem, according to Moav and Neeman, is that conspicuous consumption becomes more important the less human capital a person has acquired. Having a degree or a title is a strong signal about one’s income and reduces the necessity to buy, say, a Mercedes Cabrio.

A vicious cycle may be the result: when people or societies get poorer, they expend more on conspicuous consumption and less on the education of their children. The reduction in human capital in the next generation leads to lower income and increases the necessity for conspicuous consumption, both through the higher payoff from boasting and because human capital cannot serve as a substitute for showing off. Therefore, people consume even more conspicuously, leading to even less investment in human capital, and so on.


AND GEORGIA?

There is casual evidence for conspicuous consumption in Georgia, like a high density of Toyota Land Rovers and BMW X6’s in the streets of Tbilisi. For poorer Georgians, having a car at all instead of going around with public transport may already be conspicuously motivated. From a bank employee we heard that during the financial hardship in 2008, many people would rather sell their apartments than their cars. The density of iPhones may also be higher than what one would expect in a country with $300 nominal monthly average income, and a low savings rate and a big trade deficit also fit to the story. While we do not have numbers to substantiate our claim, it is likely that the same patterns observed in other low-income countries also apply in Georgia.

One difficulty about conspicuous consumption is that one cannot tax it away – by increasing the prices of Veblen Goods, one will make them even more attractive. And in democratic, individualistic societies, one cannot act like Emomalii Rahmon, the president of Tajikistan, who banned gold teeth, the use of cell phones in universities, and large birthday parties. He criticized wealthy citizens “for showing off their wealth by throwing elaborate parties and thereby setting a standard for others who try to appear wealthy by holding a large party despite having only modest incomes.” The President restricted the number of people and amount of food served at weddings to prevent Tajiks, 60% of whom live below the poverty line, from “using their life savings just to compete with their neighbors.”

The only way to escape the vicious cycle of conspicuous consumption is to turn it into a virtuous cycle. If one incentivizes people to accumulate more (relevant) human capital and invest more in the education of their children, they will become wealthier, and conspicuous consumption will lose importance. It may indeed be the case, however, that such positive dynamics have already set in, given the attention the educational system receives by the government, the general appreciation for literacy within the Georgian population, and the high growth rates that were achieved in the last years.

If things go well, driving big cars, using expensive cellphones, and other immature behavior will become less and less prepotent in the years to come.

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Guest - Randy on Monday, 18 May 2015 21:29

A more obvious explanation may be that this is even more evidence that reported Georgian incomes are meaningless, as anyone looking at the streets and shops of Tbilisi might conclude. In interesting research Braguinsky, Mityakov, and Liscovich (2014) found using data on new car ownership matched with data on incomes from a different source that 80%
of total earnings car-owning employees in Russia is unrecorded.

A more obvious explanation may be that this is even more evidence that reported Georgian incomes are meaningless, as anyone looking at the streets and shops of Tbilisi might conclude. In interesting research Braguinsky, Mityakov, and Liscovich (2014) found using data on new car ownership matched with data on incomes from a different source that 80% of total earnings car-owning employees in Russia is unrecorded.
Guest - megiddo02 on Monday, 18 May 2015 21:52

Randy, do you want to suggest that the $300 per capita GDP are highly inaccurate and the true income is much higher?

Randy, do you want to suggest that the $300 per capita GDP are highly inaccurate and the true income is much higher?
Guest - Sanjit Dhami on Monday, 18 May 2015 23:59

All very plausible; the examples from evolution are persuasive and might well apply to humans too. However, poor countries also have high degree of income inequality. There will be a very small upper x% of people who can actually afford extreme luxury. But this could just be a reflection of their very high levels of wealth. So just acting as the devil's advocate, how might one differentiate between conspicuous and high consumption? In the examples from evolution conspicuous consumption (e.g. Peacock displays) are hardwired into the DNA. Among humans this is a matter of choice not DNA. Many rich may also live an understated life. For a start, one might have to define conspicuous consumption in a manner that can be meaningfully measured.

All very plausible; the examples from evolution are persuasive and might well apply to humans too. However, poor countries also have high degree of income inequality. There will be a very small upper x% of people who can actually afford extreme luxury. But this could just be a reflection of their very high levels of wealth. So just acting as the devil's advocate, how might one differentiate between conspicuous and high consumption? In the examples from evolution conspicuous consumption (e.g. Peacock displays) are hardwired into the DNA. Among humans this is a matter of choice not DNA. Many rich may also live an understated life. For a start, one might have to define conspicuous consumption in a manner that can be meaningfully measured.
Nino Nanitashvili on Friday, 22 May 2015 16:36

Great Article !

Great Article !
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