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 hence we interpret this behavior as conspicuous consumption that is intended to provide a signal about unobserved income. We show that if human capital is observable and provides some information about income, a signaling equilibrium can emerge in which expected expenditure on conspicuous consumption as a fraction of total income is decreasing with income. This equilibrium results in an increasing marginal propensity to save that might generate a poverty trap