Inequality, Relative Deprivation and Financial Distress - Evidence from Swedish Register Data

Abstract

Several studies have linked rising insolvency rates to increasing inequality and argued that this might be explained by individuals' desire to "Keep up with the Joneses". Using unique administrative register data on individual insolvencies in Sweden, I test whether the probability to become insolvent is related to inequality in one's reference group or to one's income distance relative to peers. Identification relies on area fixed effects, an extensive set of background characteristics and varying the definition of relevant reference groups. I find that there is a positive relationship between inequality and insolvency, where a 10 percent increase in top incomes increases the individual probability to become insolvent by 12 percent.

Wealth Inequality: Opportunity or Unfairness?

“…Bertrand and Morse (2016) consider exposure to the level of income at the 90th or 80th percentile of the income distribution in the US state of residence and show higher consumption among the non-rich and higher bankruptcy rates on the state level. Roth (2021) uses micro data to examine exposure to top incomes in different reference groups (municipality, workplace, age group, immediate neighborhood)…”