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Do the Joneses make you financially vulnerable?

Author

Listed:
  • Barnett, Richard C.
  • Bhattacharya, Joydeep
  • Bunzel, Helle

Abstract

This paper studies a model economy populated with agents of differing incomes that get a utility boost when their consumption keeps up with their neighbors, the proverbial 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 people of different incomes join the lottery pool when the ‘kick’ from keeping up increases. Worsening income inequality may increase the number of financially vulnerable people. The analysis offers broad-brushstroke insights into the connection between inequality and financial vulnerability.

Suggested Citation

  • Barnett, Richard C. & Bhattacharya, Joydeep & Bunzel, Helle, 2016. "Do the Joneses make you financially vulnerable?," ISU General Staff Papers 201612010800001836, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genstf:201612010800001836
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    References listed on IDEAS

    as
    1. Abel, Andrew B, 1990. "Asset Prices under Habit Formation and Catching Up with the Joneses," American Economic Review, American Economic Association, vol. 80(2), pages 38-42, May.
    2. Roger Hartley & Lisa Farrell, 2002. "Can Expected Utility Theory Explain Gambling?," American Economic Review, American Economic Association, vol. 92(3), pages 613-624, June.
    3. Richard Barnett & Joydeep Bhattacharya & Helle Bunzel, 2010. "Choosing to keep up with the Joneses and income inequality," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 45(3), pages 469-496, December.
    4. Erzo F. P. Luttmer, 2005. "Neighbors as Negatives: Relative Earnings and Well-Being," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(3), pages 963-1002.
    5. Andrew E. Clark & Paul Frijters & Michael A. Shields, 2008. "Relative Income, Happiness, and Utility: An Explanation for the Easterlin Paradox and Other Puzzles," Journal of Economic Literature, American Economic Association, vol. 46(1), pages 95-144, March.
    6. John Creedy, 1997. "Labour Supply and Social Welfare when Utility Depends on a Threshold Consumption Level," The Economic Record, The Economic Society of Australia, vol. 73(221), pages 159-168, June.
    7. Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, vol. 56(4), pages 279-279.
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    9. repec:bla:ecorec:v:73:y:1997:i:221:p:159-68 is not listed on IDEAS
    10. Bill Dupor & Wen-Fang Liu, 2003. "Jealousy and Equilibrium Overconsumption," American Economic Review, American Economic Association, vol. 93(1), pages 423-428, March.
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    More about this item

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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