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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|Date of creation:||17 Apr 2008|
|Contact details of provider:|| Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070|
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- Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, vol. 56, pages 279-279.
- Lisa Farrell & Roger Hartley, 2002. "Can expected utility theory explain gambling?," Open Access publications 10197/539, School of Economics, University College Dublin.
- Andrew E. Clark & Paul Frijters & Michael A. Shields, 2008.
"Relative Income, Happiness, and Utility: An Explanation for the Easterlin Paradox and Other Puzzles,"
Journal of Economic Literature,
American Economic Association, vol. 46(1), pages 95-144, March.
- Andrew E. Clark & Paul Frijters & Michael A. Shields, 2008. "Relative income, happiness, and utility: An explanation for the Easterlin paradox and other puzzles," Post-Print halshs-00754299, HAL.
- 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).
- Erzo F. P. Luttmer, 2005.
"Neighbors as Negatives: Relative Earnings and Well-Being,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 120(3), pages 963-1002.
- Erzo F.P. Luttmer, 2004. "Neighbors as Negatives: Relative Earnings and Well-Being," NBER Working Papers 10667, National Bureau of Economic Research, Inc.
- Luttmer, Erzo F. P., 2004. "Neighbors as Negatives: Relative Earnings and Well-Being," Working Paper Series rwp04-029, Harvard University, John F. Kennedy School of Government.
- Lisa Farrell & Roger Hartley, "undated".
"Can Expected Utility Theory Explain Gambling?,"
Discussion Papers in Public Sector Economics
00/8, Department of Economics, University of Leicester.
- Roger Hartley & Lisa Farrell, 1998. "Can Expected Utility Theory Explain Gambling?," Keele Department of Economics Discussion Papers (1995-2001) 98/02, Department of Economics, Keele University.
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