Are the Joneses Making You Financially Vulnerable?
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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- Lisa Farrell & Roger Hartley, 2002. "Can expected utility theory explain gambling?," Open Access publications 10197/539, School of Economics, University College Dublin.
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