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Envy, leisure, and restrictions on working hours

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  • Francisco Alvarez-Cuadrado

Abstract

We present a simple model of capital accumulation where agents care about their consumption relative to the consumption of other members of society, `envy,' In this context we quantify the extent of the distortions and welfare costs associated with envy. Under conservative estimates of envy we find that the implied welfare losses are substantial. We explore the implications of alternative policy arrangements designed to minimize the effects of the consumption externality. Our results suggest that if the optimal tax policy is not politically feasible, restrictions on working hours provide an alternative tool to induce a market outcome that resembles the efficient allocation achieved under a benevolent central planner.

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Bibliographic Info

Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 40 (2007)
Issue (Month): 4 (November)
Pages: 1286-1310

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Handle: RePEc:cje:issued:v:40:y:2007:i:4:p:1286-1310

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  1. Erzo F.P. Luttmer, 2004. "Neighbors as Negatives: Relative Earnings and Well-Being," NBER Working Papers 10667, National Bureau of Economic Research, Inc.
  2. John Y. Campbell & John H. Cochrane, 1994. "By force of habit: a consumption-based explanation of aggregate stock market behavior," Working Papers 94-17, Federal Reserve Bank of Philadelphia.
  3. Francisco Alvarez-Cuadrado & Goncalo Monteiro & Stephen J. Turnovsky, 2004. "Habit Formation, Catching Up with the Joneses, and Economic Growth," Journal of Economic Growth, Springer, Springer, vol. 9(1), pages 47-80, 03.
  4. Alonso-Carrera, Jaime & Caballe, Jordi & Raurich, Xavier, 2005. "Growth, habit formation, and catching-up with the Joneses," European Economic Review, Elsevier, Elsevier, vol. 49(6), pages 1665-1691, August.
  5. Heckman, James J & Macurdy, Thomas E, 1980. "A Life Cycle Model of Female Labour Supply," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 47(1), pages 47-74, January.
  6. Jennifer Hunt, 1998. "Hours Reductions as Work-Sharing," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1), pages 339-381.
  7. Liu, Wen-Fang & Turnovsky, Stephen J., 2005. "Consumption externalities, production externalities, and long-run macroeconomic efficiency," Journal of Public Economics, Elsevier, Elsevier, vol. 89(5-6), pages 1097-1129, June.
  8. Alpizar, Francisco & Carlsson, Fredrik & Johansson-Stenman, Olof, 2005. "How much do we care about absolute versus relative income and consumption?," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 56(3), pages 405-421, March.
  9. Stadt, H. van de & Geer, S.A. van de & Kapteyn, A.J., 1985. "The relativity of utility: Evidence from panel data," Open Access publications from Tilburg University urn:nbn:nl:ui:12-364325, Tilburg University.
  10. Abel, Andrew B, 1990. "Asset Prices under Habit Formation and Catching Up with the Joneses," American Economic Review, American Economic Association, American Economic Association, vol. 80(2), pages 38-42, May.
  11. Fisher, Walter H. & Hof, Franz X., 2000. "Relative Consumption and Endogenous Labour Supply in the Ramsey Model: Do Status-Conscious People Work Too Much?," Economics Series, Institute for Advanced Studies 85, Institute for Advanced Studies.
  12. Valerie Ramey & Neville Francis, 2006. "A Century of Work and Leisure," Working Papers id:546, eSocialSciences.
  13. Gali, J., 1992. "Keeping Up with the Joneses: Consumption Externalities, Portfolio Choice and Asset Prices," Papers 92-22, Columbia - Graduate School of Business.
  14. Altonji, Joseph G, 1986. "Intertemporal Substitution in Labor Supply: Evidence from Micro Data," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(3), pages S176-S215, June.
  15. Bruno S. Frey & Alois Stutzer, . "What can Economists Learn from Happiness Research?," IEW - Working Papers 080, Institute for Empirical Research in Economics - University of Zurich.
  16. Richard Blundell & Thomas MaCurdy, 1998. "Labour supply: a review of alternative approaches," IFS Working Papers, Institute for Fiscal Studies W98/18, Institute for Fiscal Studies.
  17. Jaime Alonso-Carrera & Jordi Caballé & Xavier Raurich, 2004. "Welfare Implications of the Interaction between Habits and Consumption Externalities," Working Papers 125, Barcelona Graduate School of Economics.
  18. Christopher D Carroll & Jody Overland & David N Weil, 1997. "Comparison Utility in a Growth Model," Economics Working Paper Archive, The Johns Hopkins University,Department of Economics 387, The Johns Hopkins University,Department of Economics.
  19. John Y. Campbell & John Cochrane, 1999. "Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 107(2), pages 205-251, April.
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Citations

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Cited by:
  1. Laszlo Goerke, 2012. "Profit Sharing and Relative Consumption," CESifo Working Paper Series 3970, CESifo Group Munich.
  2. Alvarez-Cuadrado, Francisco & Van Long, Ngo, 2011. "Relative consumption and renewable resource extraction under alternative property-rights regimes," Resource and Energy Economics, Elsevier, Elsevier, vol. 33(4), pages 1028-1053.
  3. Simone Valente, 2007. "International Status Seeking, Trade, and Growth Leadership," CER-ETH Economics working paper series 07/75, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
  4. Goerke, Laszlo & Hillesheim, Inga, 2013. "Relative consumption, working time, and trade unions," Labour Economics, Elsevier, Elsevier, vol. 24(C), pages 170-179.
  5. Vinod Mishra & Russell Smyth, 2012. "Work Hours in Chinese Enterprises: Evidence From Matched Employer-Employee Data," Development Research Unit Working Paper Series, Monash University, Department of Economics 10-12, Monash University, Department of Economics.
  6. Laszlo Goerke, 2013. "Relative Consumption and Tax Evasion," CESifo Working Paper Series 4077, CESifo Group Munich.
  7. Markus Knell, 2009. "The Work-and-Spend Cycle in a Globalized World," Economics Bulletin, AccessEcon, vol. 29(1), pages 491-498.
  8. Francisco Alvarez-Cuadrado & Ngo Van Long, 2008. "A Permanent Income Version of the Relative Income Hypothesis," CESifo Working Paper Series 2361, CESifo Group Munich.
  9. Francisco Alvarez-Cuadrado & Ngo Van Long, 2008. "The Relative Income Hypothesis," CIRANO Working Papers, CIRANO 2008s-18, CIRANO.
  10. Goerke, Laszlo & Pannenberg, Markus, 2013. "Keeping up with the Joneses: Income Comparisons and Labour Supply," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 80033, Verein für Socialpolitik / German Economic Association.
  11. Malakhov, Sergey, 2013. "Эффект Веблена, Предельная Полезность Денег И Денежная Иллюзия
    [Veblen effect, marginal utility of money, and money illusion]
    ," MPRA Paper 51014, University Library of Munich, Germany.
  12. Francisco Alvarez-Cuadrado & Ngo Van Long, 2008. "Relative Consumption and Resource Extraction," CIRANO Working Papers, CIRANO 2008s-27, CIRANO.
  13. Koenig, Tobias & Wagener, Andreas, 2013. "Tax structure and government expenditures with tax equity concerns," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 90(C), pages 137-153.
  14. Tobias Koenig & Andreas Wagener, 2010. "Tax Structure and Government Expenditures under Tax Equity Norms," CESifo Working Paper Series 3205, CESifo Group Munich.

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