Choosing to Keep up with the Joneses

University of Aarhus Economics Working Paper No. 2008-1

27 Pages Posted: 15 Jan 2008

See all articles by Richard C. Barnett

Richard C. Barnett

Drexel University - Department of Economics & International Business

Joydeep Bhattacharya

Iowa State University - Department of Economics

Helle Bunzel

Iowa State University - Department of Economics

Abstract

Does a rise in income inequality induce people to work harder to stay in the rat race ("keep up with the Joneses") or to simply drop out? We investigate this issue in a simple new framework in which heterogeneous ability agents get extra utility if their consumption keeps up with the economy's average. The novelty is that agents are allowed to choose whether they want to stay in or drop out of the rat race. We show that sufficiently high ability agents choose to keep up with the Joneses and they enjoy higher consumption but lower leisure than those who don't. When income inequality rises in a mean-preserving manner, average leisure in the economy may fall. Our analysis touches on the question, why are Americans working so much compared to the Europeans? We posit that higher income inequality in the US, by inducing more people to join the rat race there, may be partly responsible for the transatlantic leisure divide.

Keywords: dissolution, search, mobility, city

JEL Classification: E2, J22

Suggested Citation

Barnett, Richard C. and Bhattacharya, Joydeep and Bunzel, Helle, Choosing to Keep up with the Joneses. University of Aarhus Economics Working Paper No. 2008-1, Available at SSRN: https://ssrn.com/abstract=1083906 or http://dx.doi.org/10.2139/ssrn.1083906

Richard C. Barnett

Drexel University - Department of Economics & International Business ( email )

3141 Chestnut St.
Philadelphia, PA 19104
United States

Joydeep Bhattacharya (Contact Author)

Iowa State University - Department of Economics ( email )

260 Heady Hall
Ames, IA 50011
United States
515-294-5886 (Phone)
515-294-0221 (Fax)

Helle Bunzel

Iowa State University - Department of Economics ( email )

260 Heady Hall
Ames, IA 50011
United States

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