Borrowing to Keep up Consumption

Raghuram Rajan highlights some research that shows people in more unequal areas borrowing more than in more equal areas. That is, more inequality leads to higher indebtedness.

One possible explanation for this is that people get utility not only from the level of their own consumption but from how it compares to those around (or just above) them. In this case higher inequality will lead to lower social welfare as people will be more envious. They can try to borrow to consume at the level they would like, but that can only go on so long.

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