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Questionable Luxury Taxes: Results from a Mating Game

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  • Thomas, Tobias

    ()
    (Helmut Schmidt University, Hamburg)

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    Abstract

    This contribution provides a game theoretical derivation of market demand as a function of the level and distribution of income in the considered economy: if (i) the price is low, everyone buys the good; if (ii ) the price is high, only the rich buy the good (a status good in a narrow sense). If (iii) the price is located in very high or in middle range, demand collapses. With this, we explain the critical price from which a status good acts as a distinctive signal. In addition, this approach shows the potential welfare-improving impact of conspicuous consumption. Taking these results into account, recommendations by numerous economists to prevent the welfare losses of conspicuous consumption by introducing a luxury tax are highly questionable.

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    Bibliographic Info

    Paper provided by Helmut Schmidt University, Hamburg in its series Working Paper with number 86/2008.

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    Length: 26 pages
    Date of creation: Aug 2008
    Date of revision:
    Handle: RePEc:ris:vhsuwp:2008_086

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    Related research

    Keywords: luxury tax; conspicuous consumption; mating model; signaling game; status good;

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