Peer effects of income in consumption

This article provides a new perspective of peer effects that coexist in different consumer activities and investigates how consumption of a household is affected by the level of incomes of its peers. Using unique panel data on Chinese households between 2011 and 2019, we explore the causal relationship between peers’ income and household consumption and then analyze plausible mechanisms behind it. We find that the peer effect of income in consumption is significantly positive. Higher level of average income in a reference group is associated with the household’s greater expenditure on consumption and the improvement of consumption structure. There is also evidence that peer household income helps to encourage the household consumption through its impact on household income and peer household consumption. By identifying peers’ income as the average income of other households living in the same region, in the same age group and with the same level of education, our research contributes to the literature on peer effects in consumption, mapping relationships between intragroup income and individual consumption.