2004], “Are Positional Externalities Different from Other Externalities?,” mimeo

A nice suit is one that compares favorably with those worn by others in the same local environment. More generally, a positional good is one whose utility depends on how it compares with others in the same category.2 A positional externality occurs when new purchases alter the relevant context within which an existing positional good is evaluated.3 For example, if some job candidates begin wearing expensive custom-tailored suits, a side effect of their action is that other candidates become less likely to make favorable impressions on interviewers. From any individual job seeker’s point of view, the best response might be to match the higher expenditures of others, lest her chances of landing the job fall. But this outcome may be inefficient, since when all spend more, each candidate’s probability of success remains unchanged. All may agree that some form of collective restraint on expenditure would be useful. In such cases, however, it is often impractical to negotiate private solutions. Do positional externalities then become legitimate objects of public policy concern? In attempting to answer this question, I employ the classical libertarian criterion put forth by John Stuart Mill, who wrote the state may not legitimately constrain an