Working Paper: CEPR ID: DP12478
Authors: Pascal Courty; Merwan Engineer
Abstract: We examine status preferences where agents compare their own utility relative to the utilities of others, in addition to valuing own consumption. The utility functions are, therefore, implicit functions of each other. As long as status utility comparisons are not too intense, they do not affect either the competitive equilibrium or the set of efficient allocations. However, status utility comparison may substantially reduce average utility and dramatically increase utility inequality. Equating utility with happiness operationalizes the theory and provides an explanation to the puzzle of why invidious comparisons can generate so much unhappiness without much inefficiency. Our theory has very different welfare and political economy implications from other status theories, even when reduced form representations appear observationally equivalent.
Keywords: conspicuous consumption; inequality; happiness; rat race; reference group; status; utility; welfare
JEL Codes: D10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| status utility comparisons (C62) | average utility (L97) |
| status utility comparisons (C62) | utility inequality (D11) |
| status utility (negative-sum) (C72) | average utility (L97) |
| status utility (L97) | social welfare (through progressive taxation) (H29) |
| status utility (L97) | individual utilities (interdependence) (L97) |