Incorporating Concern for Relative Wealth into Economic Models

We develop a simple model that captures a concern for relative standing. The concern for relative standing is instrumental in the sense that individ­ uals do not get utility directly from their relative standing, but rather, the concern is induced because relative standing affects consumption of stan­ dard commodities. We investigate the consequences of a concern for relative wealth in models in which individuals are making labor-leisure choice deci­ sions. Among the results, we show how individuals' decisions are affected by the aggregate income distribution and how the concern for relative wealth can generate behavior that can be interpreted as conspicuous consumption when wealth is not directly observable.

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