Status spending races, cooperative consumption and voluntary public income disclosure

Abstract

Scholars from Duesenberry to Frank have argued that the pursuit of a higher social status, although rational from the individual’s viewpoint, might be wasteful to society. Status conscious individuals find it optimal to overâ€consume positional goods and thus exert a negative externality on their peers. This paper presents a classroom experiment to introduce students to the theories of relative income. The experiment illustrates the external effect of positional goods consumption and discusses social arrangements to alleviate this externality problem. Students learn that a social arrangement as simple as voluntary income disclosure can revert individual consumption back to socially optimal levels.