On the equilibrium and welfare consequences of getting ahead of the Smiths

• DOI: http://doi.org/10.1111/jpet.12261
• Author: Thérèse Rebière,Frédéric Gavrel
• Date: 01 April 2018
• Published date: 01 April 2018

Received: 20 March 2017 Accepted: 30 May 2017

DOI: 10.1111/jpet.12261

ARTICLE

On the equilibrium and welfare consequences

of getting ahead of the Smiths

Frédéric Gavrel1Thérèse Rebière2

1CNRSand University of Caen Normandy

2LIRSA-CNAMand IZA, Department of Eco-

nomics

Wewould like to thank the referees and the edi-

tor,Rabah Amir,for their very helpful comments

andsuggestions. The usual caveat applies.

ThérèseRebière, LIRSA-CNAM and IZA,

Departmentof Economics, 40 rue des

Jeûneurs,Case 1D2P30, 75002 Paris, France

(therese.rebiere@cnam.fr).

FrédéricGavrel, CREM (UMR 6211),

CNRSand University of Caen Normandy,

Esplanadede la Paix, 14000 Caen, France

(frederic.gavrel@unicaen.fr).

This paper provides an analysis of the social consequences of people

seeking to get ahead of the Smiths. All individuals attempt to reach a

higher rank than the Smiths, including the Smiths themselves. This

attitude gives rise to an equilibrium in which all individuals have

equal utilities but unequal (gross) incomes. Due to a rat-race effect,

individualsdevote too much energy to climbing the social scale. How-

ever, laissez-faire equilibrium is an equal-utility constrained social

optimum. Conversely, a utilitarian social planner would not choose

utility equality. Unexpectedly, this social ambition theory fairly well

accounts for empirical intermediate wage inequality.

1INTRODUCTION

“So far as concerns the present question, the end sought by accumulation is to rank high in comparison with the

rest of the community in point of pecuniary strength.”—Veblen(1899/1915)

Social interaction has been the subject of much attention from economists in recent years (see Jackson, Rogers, &

Zenou, 2017 for a recent survey). This paper, inspired byThorstein Veblen’s Theory of the Leisure Class (1899/1915),

belongs to this strand of literature. It providesan analysis of the social consequences of people seeking to get ahead of

the Smiths (GAS). In accordance with Veblen(1899/1915),1individuals’ utilities not only depend on their incomes but

also on their social “status.” All people attempt to reach a higher social status than the Smiths, including the Smiths

themselves. A noticeable conclusion is that the GAS attitude is capable of generating equilibrium income dispersion

across ex ante homogenous agents, thus accounting for part of income inequality.

The idea that individual well-being is to some extent relative to that of others and that we all try to keep up with

those wealthier than ourselves dates back to Adam Smith’s Wealth of Nations (1776/1904), who noticed that happi-

ness is not linked to the stock of acquisitions, but instead to the progressive state of acquiring (see Book I, chapter

VIII paragraph 42). Smith also pointed out that prosperity makesthe poorest incapable of being content with the con-

sumption that had formerly satisfied them (see Book I, chapter VIII paragraph34). Duesenberry (1949) was the first to

empirically observethis relative income phenomenon. The well-known Easterlin paradox (Easterlin, 1974) tells us that,

while the progressive state of income acquisition is correlated with happiness, increased income does not itself lead to

1SeeArrow (1975) for a view of Veblen as an economic theorist.

Journal of Public Economic Theory.2018;20:257–270. wileyonlinelibrary.com/journal/jpet c

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