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Keeping Up With the Joneses: Analyzing the Effect of Income Inequality on Consumer Borrowing

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  • Markus Christen

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  • Ruskin Morgan

    ()

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    Abstract

    Household debt relative to disposable income increased from 60% in 1980 to 104% at the end of 2003. ‘Buying on credit’ has become so popular that an increasing number of firms generate more profit from financing than from selling their products. In this paper, we show that rising income inequality has substantially contributed to increased consumer borrowing. Income inequality affects all components of total household debt, but the impact is strongest on non-revolving debt (installment loans), which is used to finance the purchase of consumer durables. We argue and provide evidence that the income inequality effect on consumer borrowing is a result of conspicuous consumption. Rising income inequality has forced households with smaller income gains to use debt to keep up their consumption level relative to households with larger income gains. Copyright Springer Science + Business Media, Inc. 2005

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    Bibliographic Info

    Article provided by Springer in its journal Quantitative Marketing and Economics.

    Volume (Year): 3 (2005)
    Issue (Month): 2 (June)
    Pages: 145-173

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    Handle: RePEc:kap:qmktec:v:3:y:2005:i:2:p:145-173

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    Web page: http://www.springerlink.com/link.asp?id=111240

    Related research

    Keywords: debt puzzle; consumer credit; income inequality; conspicuous consumption;

    References

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    Cited by:
    1. Adkisson, Richard V. & Saucedo, Eduardo, 2012. "Emulation and state-by-state variations in bankruptcy rates," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 41(4), pages 400-407.
    2. Alexander M. Danzer & Barbara Dietz & Kseniia Gatskova & Achim Schmillen, 2013. "Showing off to the new neighbors? Income, socioeconomic status and consumption patterns of internal migrants," Working Papers 330, Institut für Ost- und Südosteuropaforschung (Institute for East and South-East European Studies).
    3. Matteo Iacoviello, 2006. "Household Debt and Income Inequality, 1963-2003," 2006 Meeting Papers 585, Society for Economic Dynamics.
    4. Wang, Lili & Lu, Wei & Malhotra, Naresh K., 2011. "Demographics, attitude, personality and credit card features correlate with credit card debt: A view from China," Journal of Economic Psychology, Elsevier, vol. 32(1), pages 179-193, February.
    5. Till van Treeck, 2012. "Did inequality cause the U.S. financial crisis?," IMK Working Paper 91-2012, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    6. Jakob Kapeller & Bernhard Schütz, 2013. "Exploring Pluralist Economics: The Case of the Minsky-Veblen Cycles," Journal of Economic Issues, M.E. Sharpe, Inc., vol. 47(2), pages 515-524, June.
    7. Ben Beachy, 2012. "A Financial Crisis Manual Causes, Consequences, and Lessons of the Financial Crisis," GDAE Working Papers 12-06, GDAE, Tufts University.
    8. Jan Behringer & Till van Treeck, 2013. "Income distribution and current account: A sectoral perspective," IMK Working Paper 125-2013, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.

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