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Relative Concerns on Visible Consumption: A Source of Economic Distortions

  • Climent Quintana-Domeque
  • Francesco Turino

Do relative concerns on visible consumption give rise to economic distortions?� We re-examine the question posited by Arrow and Dasgupta (2009) building upon their theoretical framework but recognizing that relative concerns can only apply to visible goods (e.g., cars, clothing, jewelry) and that households consume both visible and non-visible goods.� Contrary to Arrow and Dasgupta (2009), the answer to this question turns to be always affirmative: the competitive equilibrium marginal rate of substitution between the visible and non-visible goods will always be different than the socially optimal one, since individuals do not take into account the negative externality they exert on others through the consumption of the visible good, while the social planner does.� If one is willing to invoke separability assumptions, then the steady state competitive equilibrium consumption of non-visible goods will be strictly lower than the socially optimal one, consistent with expenditure patterns both in developed and developing countries.

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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 676.

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Date of creation: 10 Oct 2013
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Handle: RePEc:oxf:wpaper:676
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  1. 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.
  2. Omer Moav and & Zvika Neeman, 2012. "Saving Rates and Poverty: The Role of Conspicuous Consumption and Human Capital," Economic Journal, Royal Economic Society, vol. 122(563), pages 933-956, 09.
  3. Daniel Kahneman & Alan B. Krueger, 2006. "Developments in the Measurement of Subjective Well-Being," Journal of Economic Perspectives, American Economic Association, vol. 20(1), pages 3-24, Winter.
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