Measuring the Market Value of Non-Market Goods: The Case of Conspicuous Consumption

32 Pages Posted: 19 Nov 2010 Last revised: 23 Feb 2012

See all articles by Ricardo Perez-Truglia

Ricardo Perez-Truglia

University of California, Berkeley; National Bureau of Economic Research (NBER)

Date Written: February 2, 2012

Abstract

Although non-market goods are not directly allocated through markets, some of these goods are allocated through markets in an indirect fashion. Such is the case with conspicuous consumption: people buy market goods (e.g., clothing) to signal their wealth and then increase the probability of obtaining some non-market goods (e.g., admiration). We are the first to exploit that relationship to measure the market value of those non-market goods by using a revealed-preference approach. We estimate a signaling model using nationally representative data on consumption in the US. We then use this model to obtain welfare implications and perform a counterfactual analysis. Our estimates suggest that for each dollar spent on clothing and cars, the average household obtains approximately 35 cents in net benefits from non-market goods. The signaling mechanism seems to be a relatively efficient allocation mechanism because it attains almost 90% of the full potential benefits from non-market goods. The unattained benefits give an upper bound to the potential gains from economic policy (e.g., a tax on observable goods). The counterfactual analysis suggests that the proportional tax rate on observable goods that would correct the positional externality is in the order of 40%. Additionally, we calculate the unique non-linear tax schedule that would fully correct the externality. Finally, we show that accounting for the consumption of these non-market goods increases the Gini index of consumption inequality by almost 4%.

Keywords: conspicuous consumption, signaling, non-market goods, optimal taxation

JEL Classification: C51, D11, D12

Suggested Citation

Perez-Truglia, Ricardo, Measuring the Market Value of Non-Market Goods: The Case of Conspicuous Consumption (February 2, 2012). Available at SSRN: https://ssrn.com/abstract=1710853 or http://dx.doi.org/10.2139/ssrn.1710853

Ricardo Perez-Truglia (Contact Author)

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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