The Equilibrium Distribution of Income and the Market for Status

Abstract

This paper explores the implications for risk-taking behavior and the equilibrium distribution of income of assuming that the desire for status positions is a powerful motive and that it raises the marginal utility of consumption. In contrast to previous analyses, we consider the case in which status positions are sold in a hedonic market. We show that such a complete hedonic market in status positions can be perfectly replicated by a simpler arrangement with a "status good" and a social norm that assigns higher status to those that consume more of this good. The main result is that for a wide range of initial conditions the equilibrium distributions of income, status, and consumption are the same, that this allocation requires inequality of income and consumption, and that this allocation coincides with the optimum of a utilitarian planner.