Choosing to keep up with the Joneses

Richard C. Barnett (), Joydeep Bhattacharya () and Helle Bunzel ()
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Helle Bunzel: School of Economics and Management, University of Aarhus, Denmark, Postal: 8000 Aarhus C, Denmark

Economics Working Papers from School of Economics and Management, University of Aarhus

Abstract: Does a rise in income inequality induce people to work harder to stay in the rat race (“keep up with the Joneses”) or to simply drop out? We investigate this issue in a simple new framework in which heterogeneous ability agents get extra utility if their consumption keeps up with the economy’s average. The novelty is that agents are allowed to choose whether they want to stay in or drop out of the rat race. We show that sufficiently high ability agents choose to keep up with the Joneses and they enjoy higher consumption but lower leisure than those who don’t. When income inequality rises in a mean-preserving manner, average leisure in the economy may fall. Our analysis touches on the question, why are Americans working so much compared to the Europeans? We posit that higher income inequality in the US, by inducing more people to join the rat race there, may be partly responsible for the transatlantic leisure divide.

Keywords: keeping up with the Joneses; consumption externalities; leisure (search for similar items in EconPapers)
JEL-codes: E2 J22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2008-01-10
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Persistent link: http://EconPapers.repec.org/RePEc:aah:aarhec:2008-01

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