week 4 - utility from interpersonal comparisons Flashcards
what are two reasons why humans care about status
1) assortative matching: if one is likely to marry someone to oneself, a higher status can help to significantly boost ones capital
2) high rank is a protection from bad times: in case of a negative covariate shock (famine), those with the most resources will be able to afford scarce goods
what did frank (1984) observe
- wage distribution was more compressed than the distribution of marginal productivity
- speculated that workers of low productivity want to be compensated for being lowest in rank
- people at top pay a price for being highest in rank
why are implications on public policy if people care what others have
peoples actions create externalities, relevance with the debate on tax schemes
how did clark and oswald (1998) model how a utility function depending on status can explain herd behaviour
- a: action of social or economic kind that gives utility (e.g. running a marathon or wearing expensive clothes)
- a*: mean of other peoples actions
U = v(a-a*) + u(a) - c(a)
utility status + utility from action - cost of action
what properties does clark and oswalds utility function exhibit
- u(.) is strictly increasing and concave in a, hence: du(.)/da > 0, d^2u(.)/da^2 < 0
- v(.) is increasing in status, a - a*, hence: dv(.)/d(a − a∗) > 0
- costs are increasing in a, hence dc(.)/da > 0
- in order to have a maximum, U(.) is assumed to be concave in a for a certain interval, hence d^2U(.)/da^2 < 0
what is the FOC of clark and oswalds utility function
v′(a − a∗) + u′(a) − c′(a) = 0
for clark and oswalds utility function, what is the marginal cost equal to in equilibrium
the marginal benefit of status + the direct marginal benefit of a
what does blanchflower et al. (2009) argue
part of the obesity issue is explained by caring about status
- if utility is linear in status: people do not change their eating behaviour based on others
- if utility is convex: people invest less in status when others around them are obese
- if utility is concave: people act in the opposite way (anorexia)
if a is concave…
a moves in the same direction as a*
if a is convex…
a moves in the opposite direction to a*
the equation you need to know for the maximand
v’‘(a-a)/v’‘(a-a) + u’‘(a) - c’‘(a)
what were clark and senik’s main findings for comparison effects
- most people compare their income to work colleagues
- people compare the most with those who they interact with
- women compare more to their family than men
- self-employed compare more to family than colleagues
- poor housheolds compare more than rich households (connected to higher GDP per capita linking to higher comparison within countries )
- those who compare more are less happy
- singles compare more
- happiness can increase or decrease if someones elses income changes
what is hirschmans tunnel effect (1973)
imagine two drivings lanes
1) fast
2) stand still
those in lane 2 will begin patient but then will become frustrated due to comparison
what did card et al do
they carrie dout an experiment to look into comparison effects on income
- one group (treatment) recieved an email prior to answering the survey, the control group did not
- those with a higher relative salary to their own job description were less affected than those with a low relative wage
- most people only compared within their own department (relevant comparison group)
those with low relative wage were significantly less happy than their control counterpart group
- if unsatisfied, women were more likely to express desire to search for a new job
what were the main findings from kuhn et als postcode lottery (2011)
- participants could win a BMW or cash
- those who won a BMW mostly sold it within 6 months
- winning postcodes have a higher car consumption
- those who live next to a BMW winner are 7% more likely to buy a new car
- high implications for public policies (can make stimuli packages for durable goods)
