Thy Neighbor’s Misfortune: Peer Effect on Consumption

Abstract

Using a large, representative sample of credit and debit card transactions in Singapore, this paper studies the consumption response of individuals whose same-building neighbors experienced personal bankruptcy. The unique bankruptcy rules in Singapore suggest liquidity shocks drive personal bankruptcy decisions, leading to a substantial drop in consumption for the bankrupt. Peers’ monthly card consumption decreases by 3.4 percent over the one-year post-bankruptcy period. There exists no consumption decrease among individuals in immediately adjacent buildings, nor for consumers with diminished post-event social ties with the bankrupt. The findings imply a significant social multiplier effect of 2.8 times the original consumption shock.

Keywords: Peer Effect, Social Multiplier, Consumption, Spending, Bankruptcy, Debt, Credit Cards, Household Finance, Banks, Loans, Durable Goods, Discretionary Spending

JEL Classification: D12, D14, D91, E21, E51, E62, G21, H31