The fight-or-flight response to the Joneses and inequality

This paper studies the fight-or-flight ambivalence people show towards the success of the proverbial Joneses. If an agent cares about leisure and his consumption relative to a benchmark set by the Joneses, his preferences display the keeping-up-with-the-Joneses (KUJ) property if an increase in the benchmark urges him to substitute away from leisure into work, allowing him to finance more consumption; the opposite is labeled running-away-from-the-Joneses (RAJ). The long literature, thus far, finds a) if any agent’s behavior displays KUJ (or RAJ), everyone’s will, or b) if an agent displays KUJ (or RAJ) in one portion of the consumption space, so will he everywhere. In an otherwise-standard environment with endowment heterogeneity, we provide conditions under which different agents sharing the same underlying preferences may endogenously respond very differently to the Joneses: while some may choose to keep up, others, possibly their close neighbors, may choose to run away. These choices themselves shape the income distribution, which in turn, determine the identity and fate of the Joneses. The analysis is novel because (a) such fight-or-flight conflict does not arise in existing models of consumption externalities, and (b) it identifies an endogenous mechanism that may dampen or amplify market income inequality arising from innate heterogeneity.