A Common Consumption Pattern in China: Evidence and Mechanism*

Abstract

Using a representative sample of Chinese households, this article studies how a non-rich household's consumption is positively affected by the consumption and income of its rich reference group. Exploiting variations in the levels of the top quantiles of county–year consumption and income distributions, we document two central results. First, non-rich households consume more when exposed to a reference group with higher consumption and income. Second, the positive effect is the largest in the low tail of the household consumption distribution, which indicates that the common consumption effect can mitigate consumption inequality. Combining the above two findings, we refer to the impacts of a rich reference group on the consumption of non-rich households as the common consumption effect. We find some supporting evidence that status-signalling theory, not other classical theories, offers the most likely explanation. Relatively high-rank non-rich households are more motivated than low-rank non-rich households to signal status to their reference groups by allocating consumption toward more visible goods and services and drawing on loans. Our results hold under several robustness checks, such as controlling for confounders constant at the county level or household level, accounting for sample attrition and relaxing the exclusion restriction.