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Resource Allocation, Affluence and Deadweight Loss When Relative Consumption Matters

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  • B. Curtis Eaton

    (University of Calgary)

  • Jesse Matheson

Abstract

We 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 Info

Paper provided by Department of Economics, University of Calgary in its series Working Papers with number 2011-11.

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Date of creation: 17 Jan 2011
Date of revision: 17 Jan 2011
Handle: RePEc:clg:wpaper:2011-11

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  1. Andrew E. Clark & Paul Frijters & Michael A. Shields, 2008. "Relative Income, Happiness, and Utility: An Explanation for the Easterlin Paradox and Other Puzzles," Journal of Economic Literature, American Economic Association, vol. 46(1), pages 95-144, March.
  2. Fliessbach, K. & Weber, B. & Trautner, P. & Dohmen, T. & Sunde, U., 2007. "Social comparison affects reward-related brain activity in the human ventral striatum," Open Access publications from Maastricht University urn:nbn:nl:ui:27-13669, Maastricht University.
  3. Frank, Robert H, 1985. "The Demand for Unobservable and Other Nonpositional Goods," American Economic Review, American Economic Association, vol. 75(1), pages 101-16, March.
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  5. Carlsson, Fredrik & Johansson-Stenman, Olof & Martinsson, Peter, 2003. "Do You Enjoy Having More Than Others? Survey Evidence of Positional Goods," Working Papers in Economics 100, University of Gothenburg, Department of Economics.
  6. Sen, Amartya, 1983. "Poor, Relatively Speaking," Oxford Economic Papers, Oxford University Press, vol. 35(2), pages 153-69, July.
  7. Brekke, Kjell Arne & Howarth, Richard B. & Nyborg, Karine, 2003. "Status-seeking and material affluence: evaluating the Hirsch hypothesis," Ecological Economics, Elsevier, vol. 45(1), pages 29-39, April.
  8. B.Curtis Eaton & Mukesh Eswaran, 2009. "Well-being and Affluence in the Presence of a Veblen Good," Economic Journal, Royal Economic Society, vol. 119(539), pages 1088-1104, 07.
  9. Samuel Bowles & Yongjin Park, 2004. "Emulation, Inequality, and Work Hours: Was Thorsten Veblen Right?," UMASS Amherst Economics Working Papers 2004-14, University of Massachusetts Amherst, Department of Economics.
  10. Kerwin Kofi Charles & Erik Hurst & Nikolai Roussanov, 2007. "Conspicuous Consumption and Race," NBER Working Papers 13392, National Bureau of Economic Research, Inc.
  11. Huberman, Michael & Minns, Chris, 2007. "The times they are not changin': Days and hours of work in Old and New Worlds, 1870-2000," Explorations in Economic History, Elsevier, vol. 44(4), pages 538-567, October.
  12. Ed Hopkins & Tatiana Kornienko, 2004. "Running to Keep in the Same Place: Consumer Choice as a Game of Status," American Economic Review, American Economic Association, vol. 94(4), pages 1085-1107, September.
  13. Karen E. Dynan & Enrichetta Ravina, 2007. "Increasing Income Inequality, External Habits, and Self-Reported Happiness," American Economic Review, American Economic Association, vol. 97(2), pages 226-231, May.
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