Saving Rates and Poverty: The Role of Conspicuous Consumption and Human Capital

Poor families around the world spend a large fraction of their income consuming goods that do not appear to alleviate poverty, while saving at low rates. We suggest that individuals care about economic status and interpret this behaviour as conspicuous consumption intended to provide a signal about unobserved income. We show that if human capital is observable and correlated with income, then a signalling equilibrium in which poor individuals tend to spend a large fraction of their income on conspicuous consumption can emerge. This equilibrium gives rise to an increasing marginal propensity to save that might generate a poverty trap.