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Relative Consumption and Endogenous Labour Supply in the Ramsey Model: Do Status-Conscious People Work Too Much?

  • Fisher, Walter H.

    (Institute for Advanced Studies, Vienna)

  • Hof, Franz X.

    (Institute of Economics, University of Technology Vienna)

This paper introduces consumption externalities into a Ramsey-type model with endogenous labour supply and homogeneous agents. The instantaneous utility of any consumer is assumed to depend on work effort, own consumption and relative consumption, where the latter determines the individual's status in the society. Appropriate normality conditions with respect to consumption and leisure ensure that at least in the long run status-conscious individuals consume and work too much, compared to the social optimum, and that the capital stock is too high. Public policy can, however, induce the private sector to attain the social optimum by designing an optimal consumption tax policy.

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File URL: http://www.ihs.ac.at/publications/eco/es-85.pdf
File Function: First version, 2000
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Paper provided by Institute for Advanced Studies in its series Economics Series with number 85.

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Length: 19 pages
Date of creation: Sep 2000
Date of revision:
Handle: RePEc:ihs:ihsesp:85
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  1. Corneo, Giacomo & Jeanne, Olivier, 1997. "On relative wealth effects and the optimality of growth," Economics Letters, Elsevier, vol. 54(1), pages 87-92, January.
  2. 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.
  3. Futagami, Koichi & Shibata, Akihisa, 1998. "Keeping one step ahead of the Joneses: Status, the distribution of wealth, and long run growth," Journal of Economic Behavior & Organization, Elsevier, vol. 36(1), pages 109-126, July.
  4. Persson, Mats, 1995. " Why Are Taxes So High in Egalitarian Societies?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(4), pages 569-80, December.
  5. Harbaugh, Richmond, 1996. "Falling behind the Joneses: relative consumption and the growth-savings paradox," Economics Letters, Elsevier, vol. 53(3), pages 297-304, December.
  6. Gali, J., 1992. "Keeping Up with the Joneses: Consumption Externalities, Portfolio Choice and Asset Prices," Papers 92-22, Columbia - Graduate School of Business.
  7. Walter Fisher & Franz Hof, 2000. "Relative consumption, economic growth, and taxation," Journal of Economics, Springer, vol. 72(3), pages 241-262, October.
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