Choosing to keep up with the Joneses and income inequality
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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.
E02, I31, J22
Barnett, Richard C.; Bhattacharya, Joydeep; and Bunzel, Helle, "Choosing to keep up with the Joneses and income inequality" (2009). Economics Publications. 122.