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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.

Suggested Citation

  • Climent Quintana-Domeque & Francesco Turino, 2013. "Relative Concerns on Visible Consumption: A Source of Economic Distortions," Economics Series Working Papers 676, University of Oxford, Department of Economics.
  • Handle: RePEc:oxf:wpaper:676

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    References listed on IDEAS

    1. 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, September.
    2. Peter Kuhn & Peter Kooreman & Adriaan Soetevent & Arie Kapteyn, 2011. "The Effects of Lottery Prizes on Winners and Their Neighbors: Evidence from the Dutch Postcode Lottery," American Economic Review, American Economic Association, vol. 101(5), pages 2226-2247, August.
    3. 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.
    4. Clark, Andrew E. & Oswald, Andrew J., 1996. "Satisfaction and comparison income," Journal of Public Economics, Elsevier, vol. 61(3), pages 359-381, September.
    5. 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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    Cited by:

    1. Quintana-Domeque, Climent & Wohlfart, Johannes, 2016. "“Relative concerns for consumption at the top”: An intertemporal analysis for the UK," Journal of Economic Behavior & Organization, Elsevier, vol. 129(C), pages 172-194.
    2. Francisco Alvarez-Cuadrado & Jose Maria Casado & Jose Maria Labeaga, 2016. "Envy and Habits: Panel Data Estimates of Interdependent Preferences," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 78(4), pages 443-469, August.
    3. Rosella Levaggi & Francesco Menoncin, 2016. "Dynamic tax evasion with audits based on visible consumption," Journal of Economics, Springer, vol. 119(2), pages 131-146, October.

    More about this item


    visible goods; non-visible goods; conspicuous consumption; inconspicuous consumption; conspicuous leisure; inconspicuous leisure; labor supply; market distortions;

    JEL classification:

    • D6 - Microeconomics - - Welfare Economics
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment

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