Resource allocation, affluence and deadweight loss when relative consumption matters

B. Eaton () and Jesse Matheson

Journal of Economic Behavior & Organization, 2013, vol. 91, issue C, 159-178

Abstract: We explore the link between affluence and well-being using a simple general equilibrium model with a pure Veblen good. Individuals derive utility from the pure Veblen good based solely on how much they consume relative to others. In equilibrium, consumption of the pure Veblen good is the same for everyone, so the Veblen good contributes nothing to utility. Hence, resources devoted to the Veblen good provide us with a measure of deadweight loss. We ask: Under what preference conditions does the proportion of productive capacity devoted to the pure Veblen good increase as an economy becomes more affluent? In a relatively general preference framework we derive a sufficient condition for which the Veblen good crowds out standard forms of consumption and leisure, resulting in an inverse relationship between affluence and utility. With additional structure on the model we are able to fully characterize the behavior of deadweight loss and utility as an economy becomes more affluent.

Keywords: Relative consumption; Veblen good; Affluence; Deadweight loss (search for similar items in EconPapers)
JEL-codes: D11 D62 I31 (search for similar items in EconPapers)
Date: 2013
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:91:y:2013:i:c:p:159-178

DOI: 10.1016/j.jebo.2013.04.011

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