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Are the Joneses Making You Financially Vulnerable?

Richard Barnett (), Joydeep Bhattacharya () and Helle Bunzel

Staff General Research Papers Archive from Iowa State University, Department of Economics

Abstract: This note studies a model in which heterogeneous income agents get a utility boost only when their consumption catches up with the Joneses'. The resulting utility function is non-concave. In this setup, participation in a fair consumption lottery has the potential to make some agents ex-ante better off but more financially vulnerable. More income-diverse people join the lottery pool when the 'kick' from catching up increases. Worsening income inequality may increase the number of financially vulnerable people. The analysis sheds light on some aspects of the ongoing sub-prime mortgage crisis.

Keywords: consumption externalities; catching up with the Jonses; non-concave utility; lotteries; inequality (search for similar items in EconPapers)
JEL-codes: D01 R21 (search for similar items in EconPapers)
Date: 2008-04-17
New Economics Papers: this item is included in nep-hap, nep-upt and nep-ure
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