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Questionable Luxury Taxes: Results from a Mating Game

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  • Thomas, Tobias

    () (Helmut Schmidt University, Hamburg)

Abstract

This contribution provides a game theoretical derivation of market demand as a function of the level and distribution of income in the considered economy: if (i) the price is low, everyone buys the good; if (ii ) the price is high, only the rich buy the good (a status good in a narrow sense). If (iii) the price is located in very high or in middle range, demand collapses. With this, we explain the critical price from which a status good acts as a distinctive signal. In addition, this approach shows the potential welfare-improving impact of conspicuous consumption. Taking these results into account, recommendations by numerous economists to prevent the welfare losses of conspicuous consumption by introducing a luxury tax are highly questionable.

Suggested Citation

  • Thomas, Tobias, 2008. "Questionable Luxury Taxes: Results from a Mating Game," Working Paper 86/2008, Helmut Schmidt University, Hamburg.
  • Handle: RePEc:ris:vhsuwp:2008_086
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    Keywords

    luxury tax; conspicuous consumption; mating model; signaling game; status good;

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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