Resource allocation, affluence and deadweight loss when relative consumption matters
AbstractWe explore the link between affluence and well-being using a simple general equilibrium model with a pure Veblen good. Individuals derive utility from the pure Veblen good based solely on how much they consume relative to others. In equilibrium, consumption of the pure Veblen good is the same for everyone, so the Veblen good contributes nothing to utility. Hence, resources devoted to the Veblen good provide us with a measure of deadweight loss. We ask: Under what preference conditions does the proportion of productive capacity devoted to the pure Veblen good increase as an economy becomes more affluent? In a relatively general preference framework we derive a sufficient condition for which the Veblen good crowds out standard forms of consumption and leisure, resulting in an inverse relationship between affluence and utility. With additional structure on the model we are able to fully characterize the behavior of deadweight loss and utility as an economy becomes more affluent.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economic Behavior & Organization.
Volume (Year): 91 (2013)
Issue (Month): C ()
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Web page: http://www.elsevier.com/locate/jebo
Relative consumption; Veblen good; Affluence; Deadweight loss;
Other versions of this item:
- B. Curtis Eaton & Jesse Matheson, 2011. "Resource Allocation, Affluence and Deadweight Loss When Relative Consumption Matters," Working Papers 2011-11, Department of Economics, University of Calgary, revised 17 Jan 2011.
- D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
- D62 - Microeconomics - - Welfare Economics - - - Externalities
- I31 - Health, Education, and Welfare - - Welfare and Poverty - - - General Welfare
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