The Fight-or-Flight Response to the Joneses and Income Inequality

This paper studies the fight-or-flight ambivalence people showtowards the success of the proverbial Joneses. If an agent cares aboutleisure and his consumption relative to a benchmark set by the Joneses, hispreferences display the keeping-up-with-the-Joneses (KUJ) property if anincrease in the benchmark urges him to substitute away from leisure intowork, allowing him to finance more consumption; the opposite is labeledrunning-away-from-the-Joneses (RAJ). The long literature, thus far, finds a)if any agent's behavior displays KUJ (or RAJ), everyone's will, or b) if anagent displays KUJ (or RAJ) in one portion of the consumption space, so willhe everywhere. In an otherwise-standard environment with endowmentheterogeneity, we provide conditions under which different agents sharing thesame underlying preferences may endogenously respond very differently to theJoneses: while some may choose to keep up, others, possibly their closeneighbors, may choose to run away. These choices themselves shape the incomedistribution, which in turn, determine the identity and fate of the Joneses.The analysis is novel because a) such fight-or-flight conflict does not arisein existing models of consumption externalities, and b) it identifies anendogenous mechanism that may dampen or amplify market income inequalityarising from innate heterogeneity.