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Abstract
It has been widely recognized that the poor spends a significant proportion of their
income on social spending even at the expense of basic consumption. What are the
motives behind the observed lavish social spending among the poor? We attempt to
test three competing explanations at the social link level, risk pooling, peer effect, and
status concern, via a uniform framework based on a unique primary dataset. The data
set include household information from a three wave census type household survey as
well as a long term gift record for all households in three villages in a poor region in
rural China. Our dyadic estimations confirm the prevalence of peer influence and the
status seeking motive in shaping gift spending and its rapid growth, while risking pooling
is not a significant explanatory factor. A 1% increase in peers’ gift spending per occasion
leads to a 0.13% 0.34% increase in one’s own gift per occasion, depending on whether
household fixed effect or pairwise fixed effect dyadic model is estimated. Status seeking
for the bottom 25% and the middle 50% groups significantly pushes up gift expenditure.
Moreover, large windfall income and marriage market pressure further intensify status
competition, escalating gift giving behavior.