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Are the Joneses making you financially vulnerable?

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Author Info
Barnett, Richard C
Bhattacharya, Joydeep
Bunzel, Helle

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Abstract

This note studies a model in which heterogeneous income agents get a utility boost only when their consumption catches up with the Joneses'. The resulting utility function is non-concave. In this setup, participation in a fair consumption lottery has the potential to make some agents ex-ante better off but more financially vulnerable. More income-diverse people join the lottery pool when the 'kick' from catching up increases. Worsening income inequality may increase the number of financially vulnerable people. The analysis sheds light on some aspects of the ongoing sub-prime mortgage crisis.

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File URL: http://www.econ.iastate.edu/research/webpapers/paper_12909_08011.pdf
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Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 12909.

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Date of creation: 17 Apr 2008
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Handle: RePEc:isu:genres:12909

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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
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Related research
Keywords: catching up with the Joneses housing crisis consumption externalities non-concave utility lotteries inequality

Find related papers by JEL classification:
E0 - Macroeconomics and Monetary Economics - - General

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References listed on IDEAS
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  1. 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. [Downloadable!] (restricted)
  2. Roger Hartley & Lisa Farrell, 2002. "Can Expected Utility Theory Explain Gambling?," American Economic Review, American Economic Association, vol. 92(3), pages 613-624, June. [Downloadable!] (restricted)
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This page was last updated on 2008-7-25.

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