Monday, May 12, 2014

Signaling with luxury goods

My friend and I have been thinking about a research project; do marginalized cultural, racial, or ethnic groups use luxury goods to signal to the market that they are different from the "average" member of the group that they are typically identified with?

The luxury goods could be used to signal intelligence, wealth, reliability, or any other trait that people think is good that is typically not associated with other members of their group due to discrimination, stereotypes, racism, etc.

We initially started thinking about this in the context of modern Chinese and black people in America. A Chinese friend of mine alerted me to the fact that many people in China buy flashy cars, clothes, and accessories like jewelry and watches in large amounts relative to their income. That is they choose to spend relatively more money on the things that other people will see than they spend on private items such as housing, house furnishings, and food. This same kind of behavior can be seen in America in urban areas inhabited by relatively poor people. In these areas many of the residents, who are often disproportionately black, choose to spend their money on clothes, jewelry, and cars rather than housing or food.

But really it doesn't even have to be relatively poor people. Middle class blacks or Hispanics in America may find it worthwhile to dress nicer or drive a better car than similarly wealthy whites.

Our contention is that this is done to signal to the market that they are superior to how the "average" member of their group is typically viewed. This is done in the hopes of getting better employment opportunities, a better social network, or perhaps a better mate. The marginal benefit of buying luxury goods as a signal is larger for individuals in groups that are stigmatized than for those that are not. So for a black male who makes $50K / year it may be rational to spend a larger portion of his money on a Lexus or nice suits than a similar white male would spend. The black male is more concerned with how society at large perceives him. The marginal cost of a suit or a Lexus is the same for everyone, but the marginal benefit is higher for members of marginalized cultural, racial, or ethnic groups who are trying to differentiate themselves from the "average" member of their group. Since a higher marginal benefit on average means that the marginal benefit is going to be greater than the marginal cost more often for certain groups, those groups will have a larger amount of luxury goods relative to their income.

This theory applies to the American Irish in the late 19th century and to the American Italians in the early 20th century. I am sure it can be applied to Jews at various points in time as well.

One anecdotal example is from the Tom Cruise movie Far and Away. In that movie Tom Cruise is an Irish immigrant who ends up making some money bare knuckle boxing. How does he spend that money? On a bunch of nice hats. Instead of saving the money or investing it in something more durable, he spends it on a fashionable signaling device of the time period, presumably to show people that he is not just another lowly Irishman fresh off the boat; he is cultured, he has skills, he has wealth. I know this is a movie but that scene can be explained by the theory presented here.

To test this we would need data on wages/income and purchases. I am not sure how we could get that data for enough groups over time to make the results convincing, but I think the theory has merit.

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