---- by Rob Goldsmith ----

Measures to reduce conspicuous consumption by lower income earners in order to encourage them to boost their savings and spend more on healthcare, education and other essentials could backfire, according to recent research by INSEAD PhD candidate Nailya Ordabayeva and Associate Professor of Marketing Pierre Chandon.

Nailya Ordabayeva

“People with limited resources spend a huge portion of their budgets on status-enhancing products compared to richer people and that comes at the cost of saving more money and spending more money on basic products such as healthcare and education,” says Ordabayeva, who specializes in marketing.

Economists and politicians explain that people with fewer resources tend to spend a higher percentage of them on status-related products because of the inequality of wealth.

“The common argument is that, when inequality of wealth is high in a social group and people who are relatively poor see other people enjoying a higher standard of living, they become envious of the others and engage in conspicuous consumption to keep up with the others,” Ordabayeva says.

Most experts agree that poor people would be more likely to increase their well-being in the long term if they spent more of their resources on basic items rather than on luxury goods. Therefore, policymakers promote this behaviour by trying to reduce the differences in wealth, often through taxation.

Increased returns

But according to the research conducted by Ordabayeva and Chandon, this argument overlooks the possibility that making people more similar in a social group actually increases the percentage of people in the group who can be surpassed by engaging in conspicuous consumption.

“Making people more equal increases the status returns from conspicuous consumption,” Ordabayeva says. “When everybody is the same, conspicuous consumption actually helps you stand out from everybody else.”

Instead of just trying to “keep up with the Joneses”, people may try to “leapfrog over the Joneses” by means of conspicuous consumption.

In her dissertation, “Leapfrogging over the Joneses: When Equality Increases Conspicuous Consumption among Bottom Tier Consumers” Ordabayeva argues that increasing equality increases conspicuous consumption among the relatively poor, especially in competitive settings where people care about status.

“Arguments that say increasing equality by increasing consumption taxation or through other measures will reduce conspicuous consumption are not necessarily true when poor people are very competitive,” she says. “In a competitive context, measures to make people more similar can actually backfire and lead to greater spending.”

Competitive mindsets

The researchers conducted several studies to demonstrate this. In one, they compared two groups of people. The first group of people had no rose bushes in their gardens and lived in a neighbourhood where everyone else had varying numbers of rose bushes in their gardens (the distribution of rose bushes was unequal). The second group of people had no rose bushes and lived in a neighbourhood where most people had the same moderate number of bushes in their gardens (that is, the distribution of rose bushes was equal).

The researchers found that people with no rose bushes were happier with what they had in the equal distribution group than in the unequal distribution one, but they were more likely to spend money to beautify their garden with more rose bushes in the equal distribution group than in the one with unequal distribution.

In other studies, the researchers showed that the same pattern occurs when people are among their rivals or when they are put in a competitive mindset by reading sentences about competition. But the pattern reverses and equality reduces spending when people are among their friends or when they are put in a self-focused mindset by reading sentences about personal happiness.

The results indicate that the effectiveness of initiatives to reduce inequality depend on the competitiveness or cooperativeness of the setting.

“When relatively poor people are self-focused and cooperative, taxation really works for them; they will start saving more and spending less on status products,” Ordabayeva explains. “But when people are competitive, taxation can actually backfire and lead to greater consumption and lower savings because it will allow people to stand out from others more effectively.”

Doing the poor a disservice

This research has many real-life implications.

“Wherever certain behaviours signal status to others, where people care about how they look to each other in terms of behaviour, these results could apply,” Ordabayeva says.

For instance, policymakers in countries with competitive cultures should be aware that taxing luxury goods to reduce inequality could do a disservice to the poor, because it may encourage them to spend more on luxury goods. On the other hand, companies that sell luxury products in those cultures will benefit from the tax because it will increase sales.

In another example, airlines that have a pyramid structure of status hierarchies of consumers -- gold, platinum and silver -- could have a more condensed structure with a lot of people in the same status. This would lead to greater profits because people would be willing to pay more to jump to the next level to differentiate themselves.

The findings could also be used to promote sustainable behaviour.

“In a neighbourhood where people are very competitive and environmentally conscious, publicising information about residents’ waste reduction or energy-saving will lead to greater tendency to engage in sustainable behaviour, presuming that people care about this behaviour as a signal of their status,” says Ordabayeva.

First published: March 12, 2010

Last updated: March 12, 2010

RG/KC 03/10