Positional competition: A theory of the Great Gatsby curve and the Easterlin paradox

Baochun Peng

Journal of Economic Behavior & Organization, 2021, vol. 186, issue C, 562-575

Abstract: This paper provides a novel theory that simultaneously explains the Great Gatsby curve and the Easterlin paradox, demonstrating that these two phenomena could be driven by the same mechanism. I model positional competition, in which productive opportunities are allocated according to relative performance, as a Nash equilibrium outcome of agents reacting optimally to a distribution of productive opportunities. Positional competition is not a zero-sum game and its intensity is endogenously determined. The distribution of income and intergenerational mobility are also endogenously determined, with income following a power law distribution. As productivities become more dispersed, optimizing agents respond by competing more intensely with each other. This endogenous intensification lies at the heart of my explanation for both the Great Gatsby curve and the Easterlin paradox.

Keywords: Inequality; Mobility; Equality of opportunities; Happiness; Superstar effect; Power law distributions (search for similar items in EconPapers)
JEL-codes: D31 D63 J62 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:186:y:2021:i:c:p:562-575

DOI: 10.1016/j.jebo.2021.04.003

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