The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Veblen Goods

  • B. Curtis Eaton
Reference work entry
DOI: https://doi.org/10.1057/978-1-349-95189-5_2321

Abstract

The utility that an individual derives from a Veblen good is an increasing function of the individual’s consumption of the good relative to the consumption of others.

Keywords

Conspicuous consumption Leisure Leisure class Relative consumption trap Status and economics Upward-sloping demand curves Veblen goods Veblen, T. Well-being 

JEL Classifications

B2 

The utility that an individual derives from a Veblen good is an increasing function of the individual’s consumption of the good relative to the consumption of others.

In The Theory of the Leisure Class, Thorstein Veblen observed that people value status, and further that in modern societies one’s status is determined primarily by one’s relative consumption of highly visible goods. ‘In order to gain and hold the esteem of men it is not sufficient merely to posses wealth … The wealth … must be put in evidence, for esteem is awarded only on evidence’ (1899, p. 36). The evidence consists of the conspicuous consumption of certain costly goods as prescribed by ‘the accredited cannons of [conspicuous] consumption, the effect of which is to hold the consumer up to a standard of expensiveness and wastefulness in his consumption of goods’ (1899, p. 116). Veblen was certainly not the first person to articulate the view that esteem can be achieved by conspicuous displays of wealth, but he saw more clearly than others the futility and wastefulness of this form of status seeking.

Following Leibenstein (1950), much of the literature on Veblen goods has focused on the possibility that the demand curve might be upward sloping. The inefficiency or wastefulness associated with Veblen goods is perhaps a more serious matter – see Hopkins and Kornienko (2004) for a theoretical analysis. Veblen seems to have thought that beyond some modest level of affluence societies get caught in what might be called the relative consumption trap in which all added productivity is soaked up by the wasteful consumption of Veblen goods with no effect on well-being: ‘The need of conspicuous waste... stands ready to absorb any increase in the community’s industrial efficiency or output of goods, after the most elementary physical wants have been provided for’ (1899, p. 110).

The recent literature on perceived well-being suggests that affluent societies may in fact be caught in this trap. A number of studies have shown that the correlation of average well-being and per capita income in affluent societies is very weak, in some cases non-existent. Much of the evidence is surveyed in Robert Frank’s (1999) provocative book, Luxury Fever. Others have shown that an individual’s well-being is negatively associated with the incomes of one’s neighbours, and further that the effects on one’s well-being of an increase in one’s own income and an increase of the same magnitude in the average income of one’s neighbours are approximately offsetting (see Luttmer 2005, for example).

With the aid of a simple representative agent model, we can readily see how affluent societies can get stuck in the relative consumption trap. There is a continuum of agents, all of whom have identical preferences and budgets. Preferences of a representative person are captured in the following utility function:
$$ {U}_r\left({x}_r,{y}_r,{v}_r\right)=D\left({v}_r-v\right)+F\left({x}_r\right)+G\left({y}_r\right), $$

where vr, xr and yr are, respectively, quantities of a pure Veblen good, leisure, and a standard consumption good, and v is average consumption of the Veblen good. The Veblen good is pure in the sense that the utility derived from it, D(vrv), is dependent only on relative consumption, vrv. The functions D, F and G are strictly increasing and concave. Leisure and the standard good are essential, but the Veblen good is not (D′(0) is finite). Each individual is endowed with 1 unit of time to be allocated to leisure and work, and with asset income a. The wage rate is w, and the prices of the Veblen and standard goods are both 1.

For an interior solution to the individual’s choice problem, the following marginal conditions must hold:
$$ \frac{F^{\prime}\left({x}_r\right)}{w}={G}^{\prime}\left({y}_r\right)={D}^{\prime}\left({v}_r-v\right). $$

In addition the budget constraint, wxr + yr + vr = w + a, will be satisfied.

Since everyone is identical, in equilibrium vr = v, so the conditions that characterize an interior equilibrium are
$$ \frac{F^{\prime}\left({x}^{\ast}\right)}{w}={G}^{\prime}\left({y}^{\ast}\right)={D}^{\prime }(0), $$
and
$$ {wx}^{\ast }+{y}^{\ast }+{v}^{\ast }=w+a. $$

Notice that, in equilibrium, the marginal value of the Veblen good, D′(0), is independent of w and a, and since G ′ (y*) = D ′ (0), so too is the equilibrium quantity of the standard good.

What happens as a increases? Clearly, y* doesn’t change, and neither does x*, since F ′ (x*)/w = G ′ (y*) and w hasn’t changed. So all of the added purchasing power is devoted to the Veblen good, and, since no one’s relative consumption of the Veblen good has changed, there will be no change in equilibrium utility.

What happens as w increases? As in the first scenario, y* doesn’t change, but w having increased, x* must decrease to satisfy F ′ (x*)/w = G ′ (y*). But this implies that the increase in expenditure on the Veblen good (dv*) exceeds the increase in full income (dw*), so in this case more than all of the added purchasing power is soaked up by the Veblen good. In addition, since neither y* nor equilibrium relative consumption of the Veblen good changes, and x* decreases, equilibrium utility decreases.

So, in this model, if the equilibrium is interior, then
$$ \frac{dy^{\ast }}{da}=0,\kern0.5em \frac{dx^{\ast }}{da}=0,\kern0.5em \frac{dv^{\ast }}{da}=1,\kern0.5em \frac{du^{\ast }}{da}=0,\kern0.5em \frac{dy^{\ast }}{dw}=0,\kern0.5em \frac{dx^{\ast }}{dw}<0,\kern0.5em \frac{dv^{\ast }}{dw}>1,\kern0.5em \frac{du^{\ast }}{dw}<0. $$

Of course, the equilibrium is not necessarily interior. In particular, since D′(0) is finite, unless the society is sufficiently affluent, in equilibrium nothing is spent on the Veblen good (v* = 0). But once the society is affluent enough so that it begins to squander its resources on the wasteful Veblen good, it is stuck in the relative consumption trap.

See Also

Bibliography

  1. Frank, R. 1999. Luxury fever: Why money fails to satisfy in an era of excess. New York: Free Press.Google Scholar
  2. Hopkins, E., and T. Kornienko. 2004. Running to keep in the same place: Consumer choice as a game of status. American Economic Review 94: 1085–1107.CrossRefGoogle Scholar
  3. Leibenstein, H. 1950. Bandwagon, snob, and Veblen effects in the theory of consumers’ demand. Quarterly Journal of Economics 64: 183–207.CrossRefGoogle Scholar
  4. Luttmer, E.F.P. 2005. Neighbors as negatives: Relative earnings and well-being. Quarterly Journal of Economics 120: 963–1002.Google Scholar
  5. Veblen, T. 1899. The theory of the leisure class: An economic study of institutions, 1934. New York: The Modern Library.Google Scholar

Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • B. Curtis Eaton
    • 1
  1. 1.