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.
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Earlier versions of this paper were presented at the Midwest Macroeconomic Meetings, the 23rd Annual Congress of the European Economic Association, ZEW Workshop on Inequality and Poverty in the Global Economy, Mannheim, and Swarthmore College. We thank participants at these conferences. We also acknowledge useful input from a referee and a coeditor of this journal. Special thanks goes to David Stockman, who, over cocktails at the House of Blues in Cleveland, posed a question that sparked it all: “What if agents can’t keep up?”.
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Barnett, R.C., Bhattacharya, J. & Bunzel, H. Choosing to keep up with the Joneses and income inequality. Econ Theory 45, 469–496 (2010). https://doi.org/10.1007/s00199-009-0494-5
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DOI: https://doi.org/10.1007/s00199-009-0494-5