Conspicuous Consumption and Inequality

Harriger, Jessica and Khanna, Neha and Pape, Andreas (2010): Conspicuous Consumption and Inequality.

Abstract

We analyze the change in consumer demand following a mean preserving change in consumption inequality when there is conspicuous consumption. We model interdependent preferences including “keeping up with the Joneses” (imitating others) and “running away from the Joneses” (distinguishing oneself from others) with multiple peer groups and peer group effects (envy and snob effects). An individual not directly involved in the redistribution increases consumption of the more conspicuous good when she demonstrates i) ‘keeping up’ and a relatively stronger envy effect, or ii) ‘running away’ and a relatively stronger snob effect. Behaviors generated by existing models emerge as special cases.

• Item Type: MPRA Paper
• Language: English
• Keywords: Conspicuousness; peer group effects; keeping up with the Joneses; status signaling; envy; snob
• Subjects: D - Microeconomics > D1 - Household Behavior and Family Economics > D11 - Consumer Economics: Theory; D - Microeconomics > D3 - Distribution > D31 - Personal Income, Wealth, and Their Distributions

References

Alpizar, Francisco, Fredrik Carlsson, & Olof Johansson-Stenman. 2005. “How much do we care about absolute versus relative income and consumption?” Journal of Economic Behavior & Organization. 56: 405-21.

Charles, Kerwin K., Erik Hurst, Nikolai Roussanov. 2009. “Conspicuous Consumption and Race.” The Quarterly Journal of Economics. 124(2): 425-67.

Chugh, Sanjay. (2008). “Relative Consumption Benchmarks.” Economics Letters. 100: 204-7

Clark, Andrew, Paul Frijters, & Michael A. Shields. “Relative Income, Happiness, and Utility: An Explanation for the Easterlin Paradox and Other Puzzles.” Journal of Economic Literature. 46(1): 95-144.

Duesenberry, James. 1949. Income, Saving and the Theory of Consumer Behavior. Harvard University Press, Massachusetts.

Dupor, Bill & Wen-Fang Liu. 2003. “Jealousy and Equilibrium Overconsumption.” The American Economic Review. 93(1): 423-8

Deaton, Angus. 2003. “Health, Inequality, and Economic Development.” Journal of Economic Literature. 41: 113-58.

Fehr, Ernst and Klaus M. Schmidt. 1999. “A Theory of Fairness, Competition, and Cooperation.” The Quarterly Journal of Economics. 114: 817-68.

Ferrer-i-Carbonell, Ada. 2005. “Income and well-being: an empirical analysis of the comparison income effect”. Journal of Public Economics. 89: 997-1019.

Frank, Robert. 1985. “The Demand for Unobservable and Other Nonpositional Goods.” The American Economic Review. 75(1): 101-16

Friedman, Daniel, and Daniel N. Ostrav. 2008. “Conspicuous Consumption Dynamics” Games and Economic Behavior. 64: 121-45.

Glazer, Amihai, and Kai. A. Konrad. 1996. “A Signaling Explanation for Charity.” The American Economic Review. 86(4): 1019-28.

Hirsch, Fred. 1976. Social Limits to Growth. Harvard University Press, Massachusetts.

Hopkins, Ed, and Tatiana Kornienko. 2004. “Running to Keep in the Same Place: Consumer Choice as a Game of Status.” The American Economic Review. 94(4): 1085-107

Ireland, Norman. 1994. “On Limiting the Market for Status Signals.” Journal of Public Economics. 53: 91-110. Konrad, Kai A., and Kjell Erik Lommerud. 1993. “Relative Standing Comparisons, Risk Taking, and Safety Regulations.” Journal of Public Economics. 51: 345-58.

Leibenstein, H. 1950. “Bandwagon, Snob, and Veblen Effects in the Theory of Consumers’ Demand.” The Quarterly Journal of Economics. 64(2): 183-207.

Luttmer, Erzo F. P. 2005 “Neighbors as Negatives: Relative Earnings and Well-being.” The Quarterly Journal of Economics. 120(3): 963-1002.

Pollak, Robert A. 1976. “Interdependent Preferences.” The American Economic Review. 66(3): 309-20.

Postlewaite, Andrew 1998. “The Social Basis of Interdependent Preferences.” European Economic Review. 42: 779-800.

Sen, Amartya. 1973. On Economic Inequality. Oxford University Press. New York.

Solnick, Sara J., and David Hemenway. 1998. “Is More Always Better?: A Survey on Positional Concerns.” Journal of Economic Behavior & Organization. 37: 373-83

____ 2005. “Are Positional Concerns Stronger in Some Domains than in Others?” The American Economic Review. 95(2): 147-51