Spending on bling: What explains the demand for status goods?

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When people spend money, their choices are often influenced by the desire to signal wealth and attain social position. This insight is not entirely new – even Adam Smith, in the Wealth of Nations, complains that his contemporaries spend too much on “status goods” that are not a requirement of life, and which they most likely can’t afford.

Social signaling motives in usage seem to be present in many different economic settings, and may in fact be so common that they can be linked to larger economic phenomena, such as inequality and chronic poverty. Studies using household studies show, for example , that the poor around the world spend a strikingly large talk about of their income on visible expenditures, which may have negative implications regarding asset accumulation, household indebtedness, and investments in education. The same pattern has been shown to hold for ethnic minorities in the Unites States – so much so, that a recent study argues that differences in conspicuous consumption may account for as much as 1 / 3 of the wealth gap between White wines and African Americans

So , where does the requirement for social status, expressed via consumption choices, come from? In a latest study, we conducted a series of industry experiments to explore the psychological factors that explain status signaling conduct in consumption. We worked with a large bank in Indonesia, which marketplaces platinum credit cards – a traditional example of a visible status good – and designed a series of experiments where the bank’s customers were offered the opportunity to upgrade to a more prestigious credit card. Within this setting, we are able to tweak the status aspects of the offers to provide causal evidence on the psychological elements that explain status signaling behaviour in consumption.

Body: We use a series of experiments with premium credit cards –which are vertically differentiated by earnings requirements and appearance– to understand the particular psychological factors behind the demand designed for status goods.

The first experiment we conduct is made to test, whether people have demand for your pure status component of a good. Displaying this empirically is hard, because any kind of status good one can think of provides both consumption and status application, so that in most real-world settings it is difficult to disentangle which of these features is driving demand for the item. To get around this challenge, we caused the bank to design a control product that has all the instrumental features of the particular platinum card – same borrowing limit, discounts, customer service, and special offers – but does not look like a platinum card, thus stripping away the noticeable status component of the product. We then implemented the experiment in a number of marketing calls. In these calls, clients assigned to a control group were offered an upgrade to a benefits package that included all a key component features of the platinum card but not the visible status aspect, while customers in a treatment group were offered an upgrade to an real platinum card. The only difference involving the two offers is the visible status aspect of the card, so that we can isolate how much people are willing to pay for the particular pure status component of the card.

We find that customers are usually indeed willing to pay non-trivial levels of money for the pure status signaling aspect of the card. Take-up of the provide is approximately 7 percentage points higher in the platinum treatment team, and a benchmarking exercise suggests that the bank would have to offer a discount of more than 50 percent of the annual fee to get the same increase in take-up generated by a simple alter in color that marks the as the higher-status platinum tier.

In our second experiment, all of us test one of the main theoretical predictions that economic theory makes about standing goods: the observation that requirement for a status good should be affected by who else has access to it. To test, whether this mechanism is at perform in our setting, we use an info experiment with current platinum card clients. In this experiment, the bank called customers and informed them that it was intending to introduce a new top credit card rate – the “diamond card”! Participants were offered to be among the first customers to receive the new card once it becomes available for a nominal sign-up fee. While all participants in the experiment received the same product offer, clients assigned to a treatment group had been additionally informed that the bank acquired recently lowered the income tolerance for its platinum card, thereby growing the pool of customers who can gain access to the status good. The theoretical prediction is straightforward: if the cards in our setting are a status good, telling customers that more people are now able to access the credit card they presently own should make them more desperate to upgrade to a more powerful status great that restores the separating balance between the haves and the have-nots! This is exactly what we find: customers who are told that the income criteria for the platinum card have been recently relaxed are almost twice as likely to sign up for the improve to the new diamond card.

In our third and final experiment, we take a closer look at the psychological factors behind the demand regarding status. Why is it that people value social status? On one hand, the reasons might be purely instrumental. That is, people may value social status because they expect to reap material benefits – more powerful friends, better treatment in shops and so on. On the other hand, the reasons could be more psychologically complex. In particular, a literary works in social psychology and identity economics argues that the demand regarding social affirmation might be related to one’s self-image. To examine this hypothesis, we all set up an experiment that makes usage of an intervention from the psychology literary works. The bank again called customers and offered them either an upgrade to a platinum card or a control product. However , prior to receiving this particular offer, customers in a treatment group, were asked to complete a task that asks them to talk about an good results that made them proud – an intervention that has been shown to briefly boost self-esteem. The results confirm that the particular demand for social affirmation is really a function of self-image: Participants who also received the ego-boost intervention have got lower demand for the status good, suggesting that self-image and social image are substitutes and people demand position goods (and the social affirmations that comes with them) to compensate for lower self-esteem. This seems to hold not only in the case of credit cards – we moreover able to confirm this general result in an online experiment with a parallel design.

What do we study from these results? First, our experiments provide novel empirical evidence upon status goods that confirm a few things we’ve always suspected, yet weren’t really able to show empirically: people are willing to pay significant amounts of money to gain social status, and the need for status goods is affected by who else can afford them. Second, and more importantly, we show that will higher self-esteem causally reduces demand for status goods. We believe that better understanding the effect of self-esteem on economic choices is an important topic associated with future research, especially in settings exactly where self-esteem may be especially low, for example in populations facing poverty, low social status, and negative stereotypes.

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