Saving Rates and Poverty: The Role of Conspicuous Consumption and Human Capital. The Economic Journal

Poor families around the world spend a large fraction of their income on the consump-tion of goods that appear to be useless in alleviating poverty while saving at low rates. We develop a model that is consistent with this behavior and that explains why saving rates would be increasing in income. Our explanation is based on a trade-off between conspicuous consumption and human capital as signals for unobserved income. This trade-off produces a signaling equilibrium in which the expected fraction of expenditure on conspicuous consumption out of total income is decreasing with human capital. We show that this equilibrium may give rise to a poverty trap