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Paper by Assistant Professor Ze SONG Published in Economic Research Journal

(Correspondent: Zhang Wei) Recently, the paper Stratification in Growth: The Influence of Peer Effect on Household Consumption, co-authored by Dr. Song Ze, an assistant professor at Nankai Institute of Economics, was published in the top Chinese journal of economics, Economic Research Journal, No. 1, 2021.

The summary of it as follows:

Peer effect indicates that the behavior of individual agents is affected not only by their income, but also by their peers with the same socioeconomic status. For household consumption, peer effect reveals how the dynamic change of relative income disparity leads to the stratification of consumption among different socioeconomic groups. In China, consumption has played an increasingly significant role in economic growth since 2012. The data shows that the contribution rate of the final consumption expenditure on GDP growth, which was 57.8% in 2019, had been higher than that of gross capital formation since 2013. Meanwhile, Engle coefficient of urban household dropped from 31.4% in 2012 to 27.6% in 2019.

Based on the hypothesis of relative income consumption theory, this paper firstly analyzed the influence of peer effect on consumption volatility and consumption stratification by using the quarterly panel data of Urban Household SurveyUHS from 2010 to 2014. The results show that peer effect has a significant impact on household consumption volatility, but the degree of impact varies among different goods. Peer effect accounts for 19.8% of urban households’ consumption volatility in general, and accounts for 37.7%, 32.2% and 25.1% of clothing, food and housing consumption volatility respectively, which is in accordance with the rank of consumption visibility indexHeffetz, 2011. Peer effect aggravates the degree of consumption heterogeneity among cities in different sizes or different income groups in the same city, especially for education, entertainment, clothing and durable consumption. Clothes and cellphones are the most observable goods and usually considered as the symbol of consumption. Compared with households in the medium and small cities (cities with a population of less than 1 million), peer effect has more significant impact on the consumption of these observable goods for the households in the megalopolis (cities with a population of 5 million or more).

Education is the most important factor in social stratification. Peer effect has a greater impact on households’ education expenditure in the big city group (cities with a population of 1 million or more) than that in the medium and small city group. Meanwhile, subject to budget constraint, low- and meddle-income households have fewer choices on children’s education in the big city group. Most of them can only choose public schools, which leads to fierce competition on education opportunities. Thus, it will be harder for children in low- and middle-income family to climb or maintain the class status. Moreover, peer effect accounts for 26.7%-43.8% of the entertainment consumption for low- and middle-income households in big city group, that is, these households have enough capacity and willingness to pay for entertainment. Additionally, peer effect effectively alleviates the impact of income risks on household consumption, especially on household food consumption, and lowers the price of commodities by information complementation among peer groups.

This paper also contributes to the previous literature. Firstly, instead of analyzing peer effects by co-workersDe Giorgi et al.2020, we incorporated both habit formation and intertemporal elasticity, and identified consumption peer effects by residential location. We used county-level geographic information and household information (age, education and housing property) to construct the indicator of consumption peer effects, which is more accordance with consumption scenarios. The second contribution is that we have investigated how peer effect influences household consumption structure. We discussed the formation mechanism of consumption stratification by comparing cities in different size and different income groups in the same city. We provided a new perspective to explain the dynamic change of Chinese household consumption. Thirdly, we analyzed the risk share mechanism of peer effect from the perspective of income risk and unit value of basic food, such as grain, edible oil and vegetables. It found out that to some extent, information and risk sharing can absorb the negative impact of risk shock on household consumption.