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Conspicuous consumption in the land of Prince Charming

Perez Truglia, Ricardo Nicolas (2007): Conspicuous consumption in the land of Prince Charming.

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Conspicuous consumption is a signaling device used to allocate non-market goods (i.e. goods that cannot be traded in markets). In sharp contrast to the existing literature, in our model people do not want to signal wealth but some unobservable traits that, conditional on other observable information, are correlated with wealth. For instance, in order to get non-markets goods like respect, esteem and admiration, people want to signal the talents that generated the wealth, and not the wealth itself. Both the nature of the equilibrium and the policy implications depart dramatically from the literature. More and more papers argue that, because of relative concerns, the government should redistribute heavily. Our model shows that, once taken in a general-equilibrium context, those arguments break down. Furthermore, our model offers explanations beyond the current reach of the literature, like a theory of the natural rate of inequality.

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