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Keeping Up with "The Joneses": Reference-Dependent Choice with Social Comparisons

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  • Alastair Langtry

Abstract

Keeping up with "The Joneses" matters. This paper examines a model of reference-dependent choice where reference points are determined by social comparisons. An increase in the strength of social comparisons, even by only a few agents, increases consumption and decreases welfare for everyone. Strikingly, a higher marginal cost of consumption can increase welfare. In a labor market, social comparisons with coworkers create a big fish in a small pond effect, inducing incomplete labor market sorting. Further, it is the skilled workers with the weakest social networks who are induced to give up income to become the big fish.

Suggested Citation

  • Alastair Langtry, 2023. "Keeping Up with "The Joneses": Reference-Dependent Choice with Social Comparisons," American Economic Journal: Microeconomics, American Economic Association, vol. 15(3), pages 474-500, August.
    • Handle: RePEc:aea:aejmic:v:15:y:2023:i:3:p:474-500
    DOI: 10.1257/mic.20220088
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    References listed on IDEAS

    as
    1. Botond Kőszegi & Matthew Rabin, 2006. "A Model of Reference-Dependent Preferences," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(4), pages 1133-1165.
    2. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
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    More about this item

    JEL classification:

    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J61 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Geographic Labor Mobility; Immigrant Workers

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