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Are the Joneses Making You Financially Vulnerable?

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  • Barnett, Richard C.
  • Bhattacharya, Joydeep
  • Bunzel, Helle

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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Bibliographic Info

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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Related research

Keywords: consumption externalities; catching up with the Jonses; non-concave utility; lotteries; inequality;

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  1. Erzo F.P. Luttmer, 2004. "Neighbors as Negatives: Relative Earnings and Well-Being," NBER Working Papers 10667, National Bureau of Economic Research, Inc.
  2. Roger Hartley & Lisa Farrell, 2002. "Can Expected Utility Theory Explain Gambling?," American Economic Review, American Economic Association, American Economic Association, vol. 92(3), pages 613-624, June.
  3. Clark, Andrew E. & Frijters, Paul & Shields, Michael A., 2007. "Relative Income, Happiness and Utility: An Explanation for the Easterlin Paradox and Other Puzzles," IZA Discussion Papers 2840, Institute for the Study of Labor (IZA).
  4. Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 56, pages 279.
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