Open AccessConsumption peer effects and utility needs in India
Author(s) -
Lewbel Arthur,
Norris Samuel,
Pendakur Krishna,
Qu Xi
Publication year - 2022
Publication title -
quantitative economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 4.062
H-Index - 27
eISSN - 1759-7331
pISSN - 1759-7323
DOI - 10.3982/qe1760
Subject(s) - consumption (sociology) , microdata (statistics) , rupee , economics , welfare , public economics , peer group , affect (linguistics) , externality , social welfare , survey data collection , public good , business , microeconomics , psychology , environmental health , monetary economics , social psychology , medicine , market economy , social science , statistics , communication , sociology , exchange rate , law , political science , census , population , mathematics
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.