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Consumption Peer Effects and Utility Needs in India

Author

Listed:
  • Arthur Lewbel

    (Boston College)

  • Samuel Norris

    (University of Chicago)

  • Krishna Pendakur

    (Simon Fraser University)

  • Xi Qu

    (Shanghai Jiao Tong University)

Abstract
We construct a peer effects model where mean expenditures of consumers in one’s peer group affect utility through perceived consumption needs. We provide a novel method for obtaining identification in social interactions models like ours, using ordinary survey data, where very few members of each peer group are observed. We implement the model using standard household-level consumer expenditure survey microdata from India. We find that each additional rupee spent by one’s peers increases perceived needs, and thereby reduces one’s utility, by the equivalent of a 0.25 rupee decrease in one’s own expenditures. These peer costs may be larger for richer households, meaning transfers from rich to poor could improve even inequality-neutral social welfare, by reducing peer consumption externalities. We show welfare gains of billions of dollars per year might be possible by replacing government transfers of private goods to households with providing public goods or services, to reduce peer effects.

Suggested Citation

  • Arthur Lewbel & Samuel Norris & Krishna Pendakur & Xi Qu, 2018. "Consumption Peer Effects and Utility Needs in India," Boston College Working Papers in Economics 958, Boston College Department of Economics, revised 15 Sep 2021.
    • Handle: RePEc:boc:bocoec:958
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    References listed on IDEAS

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    2. Kourtellos, Andros & Petrou, Kyriakos, 2022. "The role of social interactions in preferences for redistribution," Journal of Economic Behavior & Organization, Elsevier, vol. 200(C), pages 716-737.
    3. Bramoullé, Y. & Ghiglino, C., 2024. "Status Consumption in Networks: A Reference Dependent Approach," Janeway Institute Working Papers 2409, Faculty of Economics, University of Cambridge.
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    6. Mingdi Wang & Biao Luo, 2024. "Research Progress of Peer Effects in Consumption Based on CiteSpace Analysis," Sustainability, MDPI, vol. 16(15), pages 1-22, July.

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    More about this item

    Keywords

    Peer Effects; Utility; Consumption; India;
    All these keywords.

    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables

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