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

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  • Peng, Baochun

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.

Suggested Citation

  • Peng, Baochun, 2021. "Positional competition: A theory of the Great Gatsby curve and the Easterlin paradox," Journal of Economic Behavior & Organization, Elsevier, vol. 186(C), pages 562-575.
    • Handle: RePEc:eee:jeborg:v:186:y:2021:i:c:p:562-575
    DOI: 10.1016/j.jebo.2021.04.003
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    Cited by:

    1. Andros Kourtellos & Chih Ming Tan & Steven N. Durlauf, 2022. "The Great Gatsby Curve," Annual Review of Economics, Annual Reviews, vol. 14(1), pages 571-605, August.

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    More about this item

    Keywords

    Inequality; Mobility; Equality of opportunities; Happiness; Superstar effect; Power law distributions;
    All these keywords.

    JEL classification:

    • J62 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Job, Occupational and Intergenerational Mobility; Promotion
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution

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