A test of the conspicuous–consumption model using subjective well-being data

•We provide a novel test of the conspicuous–consumption model using happiness data.•Happiness should be increasing in relative consumption of observable goods within the reference group.•But happiness should not depend on relative consumption of unobservable goods.•The results are consistent with the prediction of the model.

According to the conspicuous–consumption theory, people consume highly observable goods to signal their wealth to others. A growing body of evidence favors this signaling model. However, the empirical evidence available is still far from conclusive; thus, we provide evidence from a new angle. We show that the signaling model of conspicuous consumption predicts that a consumer’s well-being should increase based on his or her household’s ranking of observable consumption within its reference group, but should not be affected by its ranking in the distribution of unobservable consumption. We test this prediction using panel data on household expenditure and subjective well-being. Our evidence is consistent with the predictions of the signaling model.