New research shows that we want to buy and own the same items as our co-workers, and when our co-workers spend more money, so do we. This new knowledge forms the basis for better policy decisions.
The new research demonstrates that the conspicuous consumption effect is not what is at play when we consume. PHOTO: Pixabay
As early as 1776, the Scottish social philosopher and economist Adam Smith was interested in the observation that many people take great pleasure in spending significant amounts of money on extravagant luxury goods such as jewels and gold chains. In 1834, the Canadian economist John Rae introduced the concept of conspicuous consumption and in 1899, the Norwegian-American economist Thorstein Veblen used the concept in a general explanation of consumption patterns.
But new research demonstrates that the conspicuous consumption effect is not what is at play when we consume.
“In fact, it is something completely different that makes us spend money,” says Anders Frederiksen, professor and department head at the Department of Business Development and Technology at Aarhus BSS, Aarhus University.
A long, tough haul
And he can say that with great confidence. Because Anders Frederiksen and his two colleagues Giacomo De Giorgi (Université de Genève) and Luigi Pistaferri (Stanford University) have spent 12 years full of countless speculations and dead ends showing that our co-workers influence our consumption as well as explaining the cause.
“Our co-workers are the people we spend the most time with, and for this reason, we have studied if and how our co-workers impact our consumption patterns. However, it is immensely difficult to identify this peer effect, as there could be a number of reasons for the observed correlation between my consumption behaviour and the behaviour of my co-workers. Technically, it is quite a complicated task that could best be described as a long, tough haul,” Anders Frederiksen explains.
The journey towards answers is a story about international research environments and a young researcher who travelled abroad to study and learn. Anders Frederiksen studied in the UK as well as Germany. As a PhD student, he spent a year at Princeton University in New Jersey, and as postdoc (temporary academic position following a PhD) at Stanford University, he met a professor with extensive experience in consumption research. Together, they embarked on a journey trying to determine whether there is a peer effect in consumption patterns.
“When we started to look for results, we did not know if they existed, if they could be detected, and if they were of a size that would make our study relevant,” he says.
”We need to maintain a sensible perspective on our consumption throughout our lives, but when we are influenced by our co-workers, it might lead to over-consumption or distorted consumption in favour of more luxury goods,."
Anders Frederiksen, Professor & Head of Department - Department of Business Development and Technology , Aarhus BSS
12 years of research was rewarded
But – after 12 years, the researchers succeeded in publishing the article “Consumption Network Effects”* which demonstrates a peer effect in our consumption patterns and explains its cause.
In general, three mechanisms might cause co-workers to have similar consumption patterns:
- we influence each other (the peer effect)
- we have similar preferences, so that people with the same consumption patterns end up in the same company (selection)
- we are affected by the same circumstances because we work in the same company (external circumstance)
In order to identify the peer effect, which is central to the study, the researchers used the network structure of the working relationships. It works a bit like the patterns of infection during a coronavirus pandemic, where close co-workers affect us more than those at a greater distance.
Three possible explanations
But what is the mechanism causing the peer effect?
One possible mechanism derives from Veblen’s old theory about conspicuous consumption, in which you display your consumption. This can influence other people who then want something similar – whether it is a gold watch, dining at posh restaurants, having a Tesla, or something completely different. In other words, if we work together and see each other every day, and you drive a large Tesla, then I want one too.
The second mechanism, which could explain why other people influence our consumption pattern, is that we share risk. Assume we are salespeople and have good and bad days. If we are rewarded by our joint sales (and not our individual sales) we have the same income and thus similar consumption options.
| FACTS: Anders Frederiksen
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The third and last mechanism illustrates what the researchers call keeping up with the Joneses, meaning that when my co-workers consume more goods, then I will consume more as well – that is, our level of consumption is influenced by other people’s level of consumption.
“We find that keeping up with the Joneses is the explanation for why co-workers influence each other’s consumption. You consume more goods because you are influenced by the high level of consumption among others, which has nothing to do with gold chains – or risk. You might think that conspicuous consumption would be the explanation because the theory seems a bit more exciting, and you might also think that you observe this effect walking down the street. Well, we cannot rule out that it may apply to some small groups, but in general, it is not possible to demonstrate this effect in Danish data,” Anders Frederiksen states and elaborates:
“If you buy a Tesla, it will not induce me to buy a Tesla. But if you have a high level of consumption, it means that I will have a high level of consumption as well. It could end with both of us having a Tesla, but the Tesla it not the cause in itself.”
FACTS: Keeping up with the Joneses
A figure of speech describing how people always wish to own the same expensive items and do the same things as their co-workers, friends, or neighbours because they worry about losing their position on the social ladder.
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A basis for good political decisions
So far, so good. But why is it important whether one or the other explanation is causing the peer effect?
“We need to maintain a sensible perspective on our consumption throughout our lives, but when we are influenced by our co-workers, it might lead to over-consumption or distorted consumption in favour of more luxury goods,” says Anders Frederiksen.
Both can be a problem and might entail that we take on debt or fail to save enough for retirement. But it is important to know the difference between the mechanisms to make good political decisions.
“If you incorrectly believe that conspicuous consumption is the cause for the high level of consumption, you will tax luxury goods. Our research suggests that a better course of action would be to regulate the level of consumption to ensure that people save enough for retirement. It represents two different views of the world,” he says and adds:
“And then there is the network. Not all political measures will be equally effective because, just as with coronavirus infection, some people occupy a more central position in a network than others. A political measure aimed at decreasing or boosting consumption in the economy will thus have more effect if it is targeted towards the bottom of the consumption distribution, simply because the network is more ‘dense’ at the bottom than the top.”
Travelling abroad will give you perspective
Today, Anders Frederiksen is most of all surprised that he and his colleagues kept going – and that they maintained the curiosity about what lies around the next corner.
“We could have stopped when we found the peer effect. We could have stopped when we found out that conspicuous consumption does not explain this effect. Or when we found the keeping-up-with-the-Joneses effect. But we left no stone unturned. So even though it took a long time before we could be certain that we had demonstrated something new, I am happy that we did not stop too early,” he says and adds:
“And if I had not travelled abroad and been part of international research environments where I learned a lot and built a large network, the article would probably not have been written. I would not have learned what I did or met the people that I met. So it has been a very valuable experience.”