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|
|Date of revision:|
|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.
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