Should public policy respond to positional externalities?

A nice suit is one that compares favorably with those worn by others in the same local environment. More generally, a positional good is one whose utility depends strongly on how it compares with others in the same category.¹A positional externality occurs when new purchases alter the relevant context within which an existing positional good is evaluated.² For example, if some job candidates begin wearing expensive custom-tailored suits, a side effect of their action is that other candidates become less likely to make favorable impressions on interviewers. From any individual job seeker's point of view, the best response might be to match the higher expenditures of others, lest her chances of landing the job fall. But this outcome may be inefficient, since when all spend more, each candidate's probability of success remains unchanged. All may agree that some form of collective restraint on expenditure would be useful.In such cases, however, it is often impractical to negotiate private solutions. Do positional externalities then become legitimate objects of public policy concern? In attempting to answer this question, I employ the classical libertarian criterion put forth by John Stuart Mill³, who wrote the state may not legitimately constrain any citizen's freedom of action except to prevent harm to others. I argue that many positional externalities appear to meet Mill's test, causing not just negative feelings but also large and tangible economic costs to others who are ill-equipped to avoid them. I also discuss an unintrusive policy remedy for positional externalities, one modeled after the use of effluent charges to curb environmental pollution.The paper is organized as follows. Section 1 notes the deep similarity between the conditions that give rise to positional arms races and those that give rise to conventional military arms races. Section 2 follows with a review of evidence concerning the strength of concerns about relative position. Section 3 describes some of the tangible economic costs that people experience as a result of positional externalities arising from such concerns. Section 4 takes up the question of whether collective action directed against positional externalities is consistent with respect for individual rights. Section 5 describes how a progressive consumption tax could neutralize many of the most costly effects of positional externalities.     

Savings growth and the path of utility

Abstract.  We derive an expression relating the change in instantaneous utility to the growth of net (genuine) saving in an economy with multiple stocks and externalities that maximizes welfare in the utilitarian sense. This result is then shown to hold for decentralized competitive efficient economies as well, to yield an extension of the Hartwick rule: instantaneous utility is non-declining along a development path if genuine saving is decreasing. By way of example the rule is applied as a constant genuine saving rate rule in a simple Dasgupta-Heal-Solow-Stiglitz economy. The rule yields a path with unbounded consumption and higher wealth than on the standard Hartwick constant consumption path.     

Relative Consumption Concerns and the Optimal Tax Mix

This paper studies the optimal tax mix (taxes on income and commodities) under asymmetric information in a two‐type model, when individuals make relative consumption comparisons. The model includes both positional and nonpositional goods, taking into account the fact that relative concerns matter for some but not for all commodities. We find that in general the whole tax system is affected by the externalities caused by the consumption of positional goods, notably also the taxes on income and on a nonpositional good. The tax rates on positional goods are higher than in the absence of status effects, reflecting their Pigouvian role. The sign of the Pigouvian part in the income tax schedule is ambiguous and depends crucially on whether status goods are complements or substitutes to leisure.     

Why do many resource-rich countries have negative genuine saving?: Anticipation of better times or rapacious rent seeking

We investigate the Hartwick rule for saving of a nation necessary to sustain a constant level of private consumption for a small open economy with an exhaustible stock of natural resources. The amount by which a country saves and invests less than the marginal resource rents equals the expected capital gains on reserves of natural resources plus the expected increase in interest income on net foreign assets plus the expected fall in the cost of resource extraction due to expected improvements in extraction technology. Effectively, depletion is then postponed until better times. This suggests that it is not necessarily sub-optimal for resource-rich countries to have negative genuine saving. However, in countries with different groups with imperfectly defined property rights on natural resources, political distortions induce faster resource depletion than suggested by the Hotelling rule. Fractionalised societies with imperfect property rights build up more foreign assets than their marginal resource rents, but in the long run accumulate less foreign assets than homogenous societies. Hence, such societies end up with lower sustainable consumption and are worse off, especially if seepage is strong, the number of rival groups is large and the country does not enjoy much monopoly power on the resource market. Genuine saving is zero in such societies. However, World Bank genuine saving figures based on market rather than accounting prices will be negative, albeit less so in more fractionalised societies with less secure property rights.     

相对收入与个人效用——来自中国的证据

本文考察相对收入和相对消费对人们的影响程度,并比较社会中不同收入的不平等程度是否对这种影响起作用。笔者在中国城镇居民中进行了调查实验,用特定指标衡量人们对收入和消费的相对性关注程度。实证分析发现：（1）相对收入和绝对收入对个人效用的影响始终存在,但在炫耀性消费品（如汽车和住房）和非炫耀性消费品（如假期和保险）上的影响程度不同;（2）人们对相对收入和相对消费的关注程度较为集中在同一个区间里;（3）教育程度和职业显著地影响相对收入对人们的效用,男性比女性显著地更加在意汽车和住房的相对消费;（4）社会收入不平等没有显著影响对相对收入的关注度,但对住房消费的相对性有影响。这些发现为我们了解消费行为决策和认识宏观经济中收入不平等的消费效应有一定的启示。     

On positional consumption and technological innovation: an agent-based model

Positional behaviour is arguably a source of social externalities. Remedies for this market failure are defended by some authors and rejected by others. One of the issues discussed is the role that the competition for positional goods may have in generating technological innovation. This article aims to contribute to the understanding of the dynamics of this process through the use of an agent-based model. Simulations show a plausible dynamics of the process of technological innovation as generated by consumption of positional nature. An interpretation of the results in the scope of the policy discussion in question is provided. The influence of key factors such as income inequality, the materialization of the Hirsch conjecture, and characteristics of the network of relative preferences, is analised. We also frame the potential interest of positional consumption and this model in particular in the context of the ongoing discussion among evolutionary economists on the behaviour of demand.     

Progress along the path: evolving issues in the measurement of genuine saving

More than 10 years since a practical linkage between sustainable development and a measure of national wealth—expanded to include natural and environmental resources—was first posited, the empirical estimation of adjusted net savings, dubbed ‘genuine’ saving, has evolved considerably. In this paper we take stock of both progress achieved and the challenges that remain. We begin by recalling the key points made in Pearce and Atkinson (1993, Ecol Econ 8, 103), which presented the first cross-country estimates of savings rates adjusted to reflect depletion and degradation of the environment. We then briefly summarise the evolution of the theoretical argument linking savings and sustainability. However, the main focus of this paper is an aspect that concerned David Pearce greatly, namely the evolution of the measurement of genuine savings. We identify and consider the empirical evidence with regard to two particular measurement issues: the valuation of exhaustible resources and environmental degradation. Common to the both issues are concerns about measuring changes in national wealth in real world economies.      

GROWTH AND BUBBLES WITH CONSUMPTION EXTERNALITIES*

This paper explores the role of consumption externalities in an overlapping generations economy with capital accumulation. If consumers in each generation are concerned with other agents’ consumption behaviours, there exist intergenerational as well as intragenerational consumption externalities. It is the presence of intergenreational consumption externalities that may produce fundamental effects both on equilibrium dynamics and on steady‐state characterization of the economy. This paper demonstrates this fact in the context of a simple model of endogenously growing, overlapping‐generations economy with or without asset bubbles.     

Conscientious vs. ambivalent consumers: Do concerns about energy availability and climate change influence consumer behaviour?

Energy availability and climate change are interrelated concerns with economic components. They need to be addressed by policy makers and they require changes in energy consumption. This study examines whether concerns about energy availability and climate change influence consumer behaviour, policy perceptions, and beliefs about future energy consumption. This question is investigated by analysing data from the Eurobarometer 75.4, a comprehensive survey of citizens from all countries of the European Union that was conducted in June 2011 (n = 26,840). The regression results show that people concerned about climate change were significantly more likely to take action to mitigate climate change, and to be more favourably disposed towards energy policies and future changes in energy consumption, than people who were not concerned about climate change. On the other hand, people who were concerned about energy availability undertook fewer actions and neither supported energy policies nor believed in future changes in energy consumption. This surprising finding raises questions regarding the adequate communication of energy availability and policies to the public in the European Union.     

Positional goods and social welfare: a note on George Pendleton Watkins’ neglected contribution

Watkins's analysis of adventitious utility contains many aspects that are connected to the contemporary debate on positional goods. First, Watkins adventitious utility emerges from a process of social exclusion and can create negative externalities, in the sense that positive consumption of one individual implies negative consumption by another individual. Not only it creates negative externalities on other individuals, but it can initiate a race-to-the-bottom, where individuals waste an increasing amount of money on goods which do not possess any real utility.     

Conspicuous Leisure: Optimal Income Taxation When Both Relative Consumption and Relative Leisure Matter*

In previous studies on public policy under relative‐consumption concerns, leisure comparisons have been ignored. In this paper, we consider a two‐type optimal non‐linear income tax model, in which people care about both their relative consumption and their relative leisure. Increased consumption positionality typically implies higher marginal income tax rates for both ability types, whereas leisure positionality has an offsetting role. However, this offsetting role is not symmetric; concern about relative leisure implies a progressive income tax component (i.e., a component that is larger for the high‐ability type than for the low‐ability type). Leisure positionality does not modify the policy rule for public‐good provision.     

Determinants of the adjusted net saving rate in developing economies

The adjusted net saving rate, initially known as the genuine saving rate, was first published by the World Bank in the late 1990s as a more comprehensive measure of national saving and one more indicative of sustainable development. The adjusted net saving rate incorporated not just physical capital depreciation, but natural capital depletion and environmental damage, as well as including some human capital formation. In this paper, using a cross‐section of developing economies for 2001–2006, determinants of the adjusted net saving rate are estimated. For comparison, the same determinants for the gross national saving rate are estimated. Also, a basic Solow growth model is extended to incorporate natural resources and to justify a more comprehensive measure of savings, such as the adjusted net saving rate, for modeling economic growth. The two measures of savings are then compared as determinants in estimations of economic growth. Understanding the determinants of the adjusted net saving rate is useful for policies to promote sustainable development.     

Redistributive taxation with heterogeneous relative consumption concerns

Abstract This paper studies the impact of redistributive income taxation in a society where only some individuals are motivated by relative consumption concerns. Introducing this heterogeneity raises theoretical challenges since (i) earned income becomes an imperfect indicator of underlying ability and (ii) relative concerns may be inadmissable in the social objective. A new behavioural model is developed in which only relatively‐concerned individuals choose work effort strategically. Linear tax/transfer systems schemes are then characterized and simulated for a series of welfarist and non‐welfarist social objectives, and for different degrees of preference heterogeneity. A key result is that a government which understands the extent of relative consumption concerns–but places no social weight on individuals with such preferences–nevertheless sets a significantly more progressive tax system than a government which ignores relative consumption motivations altogether.     

Adjusted net saving and welfare change

The World Bank has estimated Adjusted net (or genuine) saving (ANS) as a macro level index of sustainable development. ANS extends the conventional net saving by adding human capital accumulation and deducting natural resources losses. This paper tests ANSas an index of sustainable development. It examines whether ANS explains changes in welfare. Welfare is measured by Infant mortality rate (IMR) and Human Development Index (HDI). The study was conducted in 36 selected developing and developed countries and covers the period 1971-2000. The results suggest a positive and significant relationship between Adjusted net saving and aggregate welfare but weak in magnitude.     

Malnutrition in the shadow of economic growth

We formulate the consumption and wealth accumulation behavior for low‐income agents who are concerned with their relative income with respect to a reference group. Using a dynamic consumption and saving model, we show the conditions under which low‐income and status‐seeking individuals accumulate more wealth and consume less of a nutritious good than the levels in the absence of status‐seeking behavior. Our results suggest that malnutrition and economic growth may go hand in hand in developing economies.     

关于我国水银行制度建设几个问题的思考

水银行作为水权租赁和水量买卖双方的中介,是调剂用水余缺、节约水交易成本和促进水资源可持续利用的一个有效工具。水银行制度建设要解决与水资源行政主管部门的关系、规避运作风险及化解交易外部性等三个大问题。作为一个经济组织,水银行要独立于水资源行政主管部门,水资源行政主管部门可以运用行政手段和经济手段来管理水银行,还可以参加水银行交易以满足公共利益的用水需求。在水银行交易出现“空头”,即买入量小于卖出量时,可以运用休耕、水库余水、地下水、节水和水管部门“公开市场业务”等方法来调整,或在出现“空头”之前就采取向卖方预订一定水量的选择权等方法。水交易具有很强的外部性,降低水银行交易外部性的方法有预防性措施和补偿性措施。     

Business incentives for sustainability: a property rights approach

Public and private demands for sustainable development put pressure on firms to develop strategies that include environmental concerns. Environmental effects from products often appear as externalities, outside the legal boundary of the producing company. These companies often possess the best competence to optimise the total life cycle environmental performance of its products. They are, however, neither obliged nor stimulated enough by policy incentives to do so from a sustainable development perspective. The policy instruments used today are mostly of a control-and-demand type, i.e. they do not create sufficient incentives to go further than hedging over set requirements. Environmental concerns and tightened environmental policy parameters have mostly been associated with the notion of additional costs and thus a restriction on economic performance. However, since the mid 1990s, several papers have called for corporate win–win situations as well as instruments giving up-stream incentives for change, but not enough abatement of environmental impacts has emerged in reality. Perhaps this is due to the lack of proper connection between economic theory on the one hand, and incentive advocating articles and instruments on the other. We propose a concept for trading of product life cycle (PLC) emission rights, based on property rights and transaction cost theories considering the problem with asymmetric information over the value chain. The initial financial impacts from such PLC instruments are shown to be significant for the system provider, since emissions—and resource use—become production costs. This provides economic incentives to take an increased responsibility for information flow as well as initiatives for product innovations.     

Relative Affluence and Child Labor—Explaining a Paradox

Some micro level empirical studies found child labor incidence increasing even with improvement in the economic conditions of the poor. This paper provides a possible explanation as to why increase in absolute income may not be sufficient to solve the problem of child labor. We argue that people in general are not just concerned about their own consumption; they are very much affected by the consumption of their peers. While taking decisions regarding the time allocation of their children between work and leisure, parents do keep an eye on their relative position in the society. We develop a theoretical model of household decision making to show that child labor supply from a poor family can increase even with improvements in its economic conditions, if the family's relative position in the society deteriorates and if the relative status effect is sufficiently strong.     

生态伦理的经济功能及其实现途径

本文主要探讨生态伦理的经济功能及其实现途径。生态伦理把人类道德关怀的对象由原有的人类的范围扩大到整个自然界,通过调节人与自然的关系,实现人与自然的和谐发展。生态伦理具有一定的经济功能,有助于解决环境的负外部性问题、能够推动经济增长方式的转变、促进生活消费方式的转变、促进经济的可持续发展。     

Consumption externalities: a representative consumer model when agents are heterogeneous

We examine a growth model with consumption externalities where agents differ in their initial capital endowment and their reference group. We show under which conditions the aggregate equilibrium with heterogeneous agents replicates that obtained with a representative consumer, despite the fact that different individuals have different consumption levels. Next we consider the implications of the presence of consumption externalities for the long-run distributions of income and wealth. We find that, in a growing economy, “keeping up with the Joneses” results in less inequality than would prevail in an economy with no consumption externalities.