Economics Working Papers

Publication Date

12-12-2018

Number

19002

Abstract

This paper studies the fight-or-flight ambivalence people show
towards the success of the proverbial Joneses. If an agent cares about
leisure and his consumption relative to a benchmark set by the Joneses, his
preferences display the keeping-up-with-the-Joneses (KUJ) property if an
increase in the benchmark urges him to substitute away from leisure into
work, allowing him to finance more consumption; the opposite is labeled
running-away-from-the-Joneses (RAJ). The long literature, thus far, finds a)
if any agent's behavior displays KUJ (or RAJ), everyone's will, or b) if an
agent displays KUJ (or RAJ) in one portion of the consumption space, so will
he everywhere. In an otherwise-standard environment with endowment
heterogeneity, we provide conditions under which different agents sharing the
same underlying preferences may endogenously respond very differently to the
Joneses: while some may choose to keep up, others, possibly their close
neighbors, may choose to run away. These choices themselves shape the income
distribution, which in turn, determine the identity and fate of the Joneses.
The analysis is novel because a) such fight-or-flight conflict does not arise
in existing models of consumption externalities, and b) it identifies an
endogenous mechanism that may dampen or amplify market income inequality
arising from innate heterogeneity.

JEL Classification

E2, I31, J22

Departments

Department of Economics, Iowa State University

File Format

application/pdf

Length

43 pages

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