Consumption Segregation

A man in a hoodie looks down into his wallet as dollar bills fly out of it and leave it empty.

Over the past few decades, economic inequality in the United States has been increasing, along with an accompanying increase in spatial segregation by income. While there is ample work on income and other forms of segregation, less is known about the segregation of consumption.

In Barcelona School of Economics Working Paper 1406, “Consumption Segregation,” Corina Boar and Elisa Giannone explore new longitudinal and consumer-level data to measure consumption segregation, a new dimension of residential segregation, in the US. Their findings show that consumption segregation can exacerbate wealth inequality through social comparisons.

Consumption segregation has been relatively steady during the past 20 years

Unlike income segregation, consumption segregation has remained relatively stable over the past two decades. This stability masks underlying dynamics: a decrease in the segregation based on non-durable goods consumption contrasted with an increase in segregation related to vehicle consumption.

Among various categories, housing consumption exhibits the highest level of segregation. The analysis reveals significant spatial differences across the US states: New York, the most segregated state, exhibits 11 times more consumption segregation than Wyoming, the least segregated.

The study also identifies that regions with higher levels of consumption segregation tend to be wealthier, larger, have younger and more educated populations, and a smaller percentage of the population is white.

Income segregation is the main determinant of consumption segregation

The authors explore the extent to which consumption segregation is related to other dimensions of segregation that have been previously studied. They find an important role for income segregation as a determinant of consumption segregation, even when accounting for previously documented dimensions of segregation such as race, education, and age.

This result is consistent with standard consumption-saving theory, which predicts that income and consumption are positively related due to market frictions or persistent income differences that prevent consumption insurance. The authors establish that market frictions that limit the ability of households to smooth shocks to income, play a more predominant role in explaining the patterns in the data.

Consumption segregation may lead to higher wealth inequality in the presence of social comparisons

The authors argue that consumption segregation can worsen wealth disparities due to social comparisons, where individuals aspire to match their neighbors’ spending patterns. They develop this idea within a simplified model that considers regional differences and wealth accumulation.

According to the model, in areas with lower segregation, less wealthy households are motivated to save more in order to afford visible consumption goods, thus narrowing the wealth gap with their wealthier neighbors. The authors find empirical support for the prediction of the model regarding the link between consumption segregation and wealth inequality.

In summary, the authors combine new and existing data to investigate consumption segregation in the US, finding that while overall consumption segregation has remained stable over the last two decades, there is notable variation across different states. They highlight a strong positive correlation between income and consumption segregation.

The authors suggest that this form of segregation could exacerbate wealth inequality by dampening the savings incentive for low-income households, thereby potentially widening the wealth gap. This mechanism indicates how consumption patterns can influence economic disparities.