Genuine Saving And Positional Externalities

Much evidence suggests that people are concerned with their relative consumption. Yet, positional externalities have so far been ignored in savings†based indicators of sustainable development. This article examines the implications of relative consumption concerns for measures of sustainable development by deriving analogues to genuine saving when people are concerned with their relative consumption. Unless the positional externalities have been internalized, an indicator of such externalities must be added to genuine saving to arrive at the proper measure of welfare change. We also show how relative consumption concerns affect the way public investment ought to be reflected in genuine saving.