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Relative Concerns on Visible Consumption: A Source of Economic Distortions

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  • Quintana-Domeque Climent

    (Department of Economics, University of Oxford, Manor Road Building, Manor Road, Oxford OX1 3UQ, UK)

  • Turino Francesco

    (Departament de Fonaments de l’Anàlisi Econòmica, Universitat d’Alacant, Campus de Sant Vicent del Raspeig, 03690, Alacant, Spain)

Abstract

Do relative concerns on visible consumption give rise to economic distortions? We re-examine the question posited by Arrow and Dasgupta (2009) building upon their general framework but recognizing that relative concerns can only apply to visible goods (e.g., cars, clothing, jewelry) and that households consume both visible and non-visible goods. Contrary to Arrow and Dasgupta (2009), the answer to this question turns to be always affirmative: the competitive equilibrium will always be different than the socially optimal one, since individuals do not take into account the negative externality they exert on others through the consumption of the visible good, while the social planner does. If one invokes separability assumptions, then the steady state competitive equilibrium consumption of non-visible goods will be strictly lower than the socially optimal one.

Suggested Citation

  • Quintana-Domeque Climent & Turino Francesco, 2016. "Relative Concerns on Visible Consumption: A Source of Economic Distortions," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 16(1), pages 33-45, January.
    • Handle: RePEc:bpj:bejtec:v:16:y:2016:i:1:p:33-45:n:12
    DOI: 10.1515/bejte-2015-0025
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    Cited by:

    1. Francisco Alvarez-Cuadrado & Jose Maria Casado & Jose Maria Labeaga, 2016. "Envy and Habits: Panel Data Estimates of Interdependent Preferences," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 78(4), pages 443-469, August.
    2. Jose María Casado, 2018. "The role of the social environment in household consumption decisions in Spain," Economic Bulletin, Banco de España, issue MAR.
    3. Rosella Levaggi & Francesco Menoncin, 2016. "Dynamic tax evasion with audits based on visible consumption," Journal of Economics, Springer, vol. 119(2), pages 131-146, October.
    4. Quintana-Domeque, Climent & Wohlfart, Johannes, 2016. "“Relative concerns for consumption at the top”: An intertemporal analysis for the UK," Journal of Economic Behavior & Organization, Elsevier, vol. 129(C), pages 172-194.

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    More about this item

    JEL classification:

    • D6 - Microeconomics - - Welfare Economics
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment

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