Consumption peer effects and utility needs in India

Abstract

We construct a peer effects model of consumption where mean expenditures of consumers in one's peer group affects one's utility through perceived consumption needs. We show model identification with standard household-level consumer expenditure survey microdata, even when most members of each peer group are not observed. We find that in India, each additional rupee spent by one's peers increases one's perceived needs, thereby reducing money metric utility, by 0.5 rupees. One implication is that welfare gains of hundreds of billions of rupees per year might be possible by replacing private government transfers with the provision of public goods.