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Consumption Peer Effects and Utility Needs in India

Arthur Lewbel (), Samuel Norris, Krishna Pendakur and Xi Qu ()
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Samuel Norris: University of Chicago

No 958, Boston College Working Papers in Economics from Boston College Department of Economics

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.

Keywords: Peer Effects; Utility; Consumption; India (search for similar items in EconPapers)
JEL-codes: C3 D1 (search for similar items in EconPapers)
Date: 2018-08-15, Revised 2021-09-15
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