Title

Choosing to keep up with the Joneses and income inequality

Campus Units

Economics

Document Type

Article

Publication Version

Submitted Manuscript

Publication Date

2009

Journal or Book Title

Economic Theory

Volume

45

Issue

3

First Page or Article ID Number

469

Last Page

496

DOI

10.1007/s00199-009-0494-5

Abstract

We study a variant of the conventional keeping-up-with-the-Joneses setup, in which heterogeneous-ability agents care both about consumption and leisure and receive an utility premium if their consumption exceeds that of the Joneses’. Unlike the conventional setup in which all agents are assumed to want to participate in the rat race of staying ahead of the Joneses, our formulation explicitly permits the option to drop out. Mean-preserving changes in the spread of the underlying ability distribution, via its effect on the economy-wide composition of rat-race participants and drop-outs, have important consequences for induced distributions of leisure and income, consequences that are unobtainable using conventional keeping-up preferences.

JEL Classification

E02, I31, J22

Comments

This is a working paper of an article from Economic Theory, Vol. 45 no. 3 (2010): 469-496, doi: 10.1007/s00199-009-0494-5