Thy Neighbor’s Misfortune: Peer Effect on Consumption

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.

Agarwal, Sumit and Qian, Wenlan and Zou, Xin, Thy Neighbor’s Misfortune: Peer Effect on Consumption (August 22, 2020). American Economic Journal: Economic Policy, forthcoming, Available at SSRN: https://ssrn.com/abstract=2780764 or http://dx.doi.org/10.2139/ssrn.2780764