Positional Preferences: Efficiency and Distortions under Welfarist- and Paternalistic Governments

Wendner, Ronald and Ghosh, Sugata (2017): Positional Preferences: Efficiency and Distortions under Welfarist- and Paternalistic Governments.

Abstract

This paper analyzes the distortionary effects of positional preferences when labor supply is exogenous under both a welfarist and a paternalistic government. Extending the prior literature, reference levels may be partially exogenous to the government (e.g., determined by consumption choices in a foreign country), and individuals may be positional with respect to wealth in addition to consumption. Neither consumption- nor consumption-cum-wealth positionality needs to cause inter-temporal distortions under either welfare criterion. We derive necessary and sufficient conditions for non-distortion of positional preferences. If those conditions are not satisfied, the same reference levels of consumption and wealth can give rise to under-saving or to over-saving -- depending on the extend to which the reference levels are exogenous to the government. Moreover, we provide conditions for which positional preferences for wealth and consumption imply over-consumption with respect to the welfarist criterion but, at the same time, over-saving with respect to the paternalistic criterion.

• Item Type: MPRA Paper
• Language: English
• Keywords: Status, keeping up with the Joneses, positional preferences, distortion, welfarist government, paternalistic government, Ak model
• Subjects: D - Microeconomics > D9 - Intertemporal Choice > D91 - Intertemporal Household Choice ; Life Cycle Models and Saving; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O40 - General

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