Cardinal Sins? Conspicuous Consumption, Cardinal Status and Inequality

This paper analyzes the social dilemma arising when a large population of individuals with differing incomes have concerns over relative deprivation in terms of visible or conspicuous consumption. These relative concerns are cardinal—people care about the size of the gap between own and others’ consumption—and include inequity aversion, where negative comparisons are more important than positive, rivalrous preferences, and comparison with mean consumption. The resulting Nash equilibrium is inefficient, with consumption generally exceeding the socially efficient level. In this model, the income distribution has a direct effect on behavior and under rivalrous preferences, an increase in incomes for the rich can raise consumption at all income levels and make almost everyone worse off.