Does the Quest for Status Give Rise to Excessive Work Effort and Excessive Consumption? – Relative Consumption Versus Relative Wealth

This paper introduces the quest for status into a Ramsey-type model with en-dogenous labor supply and homogeneous agents. If status is determined by relative consumption, then in the long run individuals consume and work too much, while the capital-labor ratio coincides with the socially optimal level. If status depends on relative wealth, then the steady-state levels of consumption and the capital-labor ratio exceed their socially optimal counterparts, while the effect on work effort is ambigu-ous. By taxing either consumption or investment income, public policy can induce the private sector to attain the social optimum