The pandemic has caused economic hardship for many. Some individuals were made bankrupt. While it is common sense that the bankrupt individual will try to markedly cut down on his/her spending, it is lesser known that the individual’s neighbours may indirectly reduce their spending as well.
Neighbours may know of one’s bankruptcy either through direct communication, or indirect observation. For example, neighbours may observe that the bankrupt individual’s car is not in the carpark anymore, and the individual is now taking public transport. Of course, this is not to suggest that people who switch to public transport are made bankrupt, but a densely populated neighbourhood is an intricate network in which word can spread.
So how does one’s misfortune affect the neighbours’ consumption? The data tells the story.
Spillover effect of personal bankruptcy
Using information on personal bankruptcy cases in Singapore, our study identified neighbours in the same building as a bankrupt individual and measured their spending patterns based on credit and debit card transactions from a leading Singapore bank. The study looked at 1,655 bankrupt individuals and 17,326 neighbours living in the same buildings.
The residents come from a range of occupations and races, which suggests there is no clustering of people with the same occupation, that can drive similar spending patterns.
Compared to the year before their neighbour’s bankruptcy, the study found that people in the same building significantly reduced their monthly total card spending by around 3.4 percent during the year following the bankruptcy.
Interestingly, there was no change in the spending behaviour of those living in nearby buildings within a 100-metre or 100- to 300-metre vicinity.
We also calculated that a 10 percent reduction in a bankrupt individual’s spending led to a 28 percent reduction in spending across the entire building. The spillover effect of the bankruptcy is staggering with almost three times the magnitude of the original bankruptcy.
While this study is done in Singapore, there are many cities with dense populations where word of a neighbour’s bankruptcy could spread.
So don’t underestimate the effect of your neighbour. While this study centred on bankruptcy, a negative shock, research has shown that positive shocks such as a neighbour’s lottery win can affect one’s spending as well. In those studies, the lottery winners had more conspicuous consumption, and the neighbours subconsciously tried to match their spending as well. Unfortunately though, this meant the neighbours’ probability of going bankrupt increased as well.
As the research studies show, many external events can affect how we spend individually. In this pandemic when the purse strings are tight, being more aware of such external factors can help one to manage his/her personal finances better.
On the broader level, policy makers can be mindful that for every dollar they spend to encourage consumption, the effect may be more than one dollar. There’s a spillover effect as the neighbours may be watching how one spends.