DURABLE CONSUMPTION AS A STATUS GOOD: A STUDY OF NEOCLASSICAL CASES

Abstract

In this paper we extend the representative agent model of the consumer to incorporate durable consumption goods that generate status, where status depends on relative consumption. The study is done in the neoclassical context and incorporates analytical and numerical results. In the closed economy framework both endogenous and fixed employment cases are considered. A small open economy version of the model is also developed. We derive the intertemporal equilibria and establish that in all instances they are saddlepoint stable. Among our principle results, we show in the closed economy context with endogenous work effort that an increase in the degree of status preference raises durable consumption, its stock, employment, and physical capital. In addition, an increase in the status preference parameter affects the stable speeds of adjustment in the special case of fixed employment, depending on whether it raises or lowers the intertemporal elasticity of substitution. These results extend, in general, to the small open economStatus Seeking, Durable Consumption, Relative Consumption