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Choosing to keep up with the Joneses and income inequality

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  • Richard Barnett

    ()

  • Joydeep Bhattacharya

    ()

  • Helle Bunzel

    ()

Abstract

We study a variant of the conventional keeping-up-with-the-Joneses setup in which heterogeneous-ability agents care both about consumption and leisure and receive an utility premium if their consumption exceeds that of the Joneses'. Unlike the conventional setup in which all agents are assumed to want to participate in the rat race of staying ahead of the Joneses, our formulation explicitly permits the option to drop out. Mean-preserving changes in the spread of the underlying ability distribution, via its effect on the economy-wide composition of rat-race participants and drop-outs, have important consequences for induced distributions of leisure and income, consequences that are unobtainable using conventional keeping-up preferences.

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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 45 (2010)
Issue (Month): 3 (December)
Pages: 469-496

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Handle: RePEc:spr:joecth:v:45:y:2010:i:3:p:469-496

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Keywords: Leisure distribution; Rat race; Keeping up with the Joneses; Income inequality; J 22; E2; D1;

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References

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  1. Roger Hartley & Lisa Farrell, 2002. "Can Expected Utility Theory Explain Gambling?," American Economic Review, American Economic Association, vol. 92(3), pages 613-624, June.
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  9. A. Abel, 2010. "Asset prices under habit formation and catching up with the Jones," Levine's Working Paper Archive 1395, David K. Levine.
  10. Cecilia García-Peñalosa & Stephen Turnovsky, 2008. "Consumption externalities: a representative consumer model when agents are heterogeneous," Economic Theory, Springer, vol. 37(3), pages 439-467, December.
  11. Stavros Drakopoulos, 2008. "The paradox of happiness: towards an alternative explanation," Journal of Happiness Studies, Springer, vol. 9(2), pages 303-315, June.
  12. Bill Dupor & Wen-Fang Liu, 2003. "Jealousy and Equilibrium Overconsumption," American Economic Review, American Economic Association, vol. 93(1), pages 423-428, March.
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  14. Ngo Van Long & Koji Shimomura, 2002. "Relative Wealth, Status Seeking, and Catching Up," CIRANO Working Papers 2002s-09, CIRANO.
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  16. Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, vol. 56, pages 279.
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Cited by:
  1. Gershman, Boris, 2010. "The two sides of envy," MPRA Paper 25422, University Library of Munich, Germany.
  2. Chang, Ming-Jen & Chang, Juin-Jen & Shieh, Jhy-Yuan, 2014. "Keeping up with the Joneses and exchange rate volatility in a Redux model," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 569-584.

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