In order to explain the reasons why people's consumption decisions might be affected by the decisions of other people, in this paper we focus on the role of status-seeking behavior. There is growing evidence that confirms the hypothesis that people care about social status. However, an overview of the different economic models available and recent empirical findings on this topic suggest an overlapping of different strands of the literature. Frank and Heffetz (2011) highlight that evidence on this topic has been accumulating in several different strands of the literature, from empirical studies that explore the role of reference groups on the level of consumption of certain goods, from studies that explore how relative income affects individual well-being (happiness literature) or the evidence from experimental studies on individuals' social preferences or preferences for status. Recent developments in the field of behavioral economics and on the specific role of relative positions, emulative behavior and social interactions have reinvigorated this research line (Frank and Heffetz, 2008).
The idea that peer's decisions play a crucial role in explaining individual consumption decision has a long story in social sciences and particularly in economic models. Positional or relative income concern, transmission of preferences or tastes, imitation, informational externalities, identity or status seeking behavior are some of the channel which could explain that relationship. However, how much these channels affect the magnitude of consumption decision on positional good has received limited attention in empirical economic literature. The main contribution of this paper is to fill this gap by providing new evidence on the role of social status behaviors on consumption on visible goods, particularly analyzing that behavior among groups of youngsters’ friends.
Our original experimental design seeks to provide evidence to answer whether individuals’ consumption of positional goods is affected by the choices of others (specifically, friends), due to status seeking behavior. In order to advance in this sense, we focus on youngster's consumption decision and the role of their peer's choices. The main challenges of our design are how to reproduce consumption decisions in a real situation and how to isolate status seeking consumption from other peer-group effects, such as: information, network economies and identity. The main hypothesis to be tested is whether the consumption of a positional good by individual i belonging to peer group j increases the willingness to pay for that good for the remaining group members j-i.
Main experiment design: A sample of individuals aged 20-22 (followed by the longitudinal study, ELBU) participate in the field experiment. ELBU respondents will be randomly pre-allocated to a “Reference treatment” (RT) or “Reference control group” (RC) and (independently of that) they will be assigned to be eligible to receive 30 tickets for a lottery of a positional (P) or a non-positional good (NP). The price of each good is 350 U$S (Approximately a minimum wage). Each ELBU youngster provides the names and contact information of four close friends. Their friends are visited in a second step, and they participate in a consumption decision among the same two goods: P and NP. ELBU's friends (aged between 19-28) have to assign 10 lottery tickets to a P and NP good. When they make their choice, 50% have their friends as a reference point (information treatment) and 50% chooses without any additional information (control).
A complementary strategy is based on an adaption of Alpizar et al (2005) experimental survey. That strategy allows us to measure the degree of positionality of selected good. Also, we explore if preferences for relative income depends knowledge about what determines the position in the income distribution: effort or heritage.
There are several arguments that justify the relevance on provides evidence on this topic. At the microeconomic level, status-seeking consumption can compete with other valuable allocations that contribute to increase wellbeing in the long run, such as education, health, leisure or savings (Charles et al, 2009; Schor,1998; Bowles and Park, 2005). Furthermore, the race for status could generate wasteful consumption, turning into aggregate social welfare losses, in terms of private expenditure and potential complementarity with public investment (Frank, 2018). Thus, the potential negative effects of status-seeking behavior have a wide set of policy implications, ranging from progressive taxation to luxury goods, to educational and cultural interventions (Bowles and Park, 2005; Cortina, 2011; Crocker and Linden, 1998; Frank, 2016)