Positional Preferences, Endogenous Growth, and Optimal Income- and Consumption Taxation

Abstract

Abstract. This paper analyzes the impact of positional preferences, exhibiting conspicuous consumption and conspicuous wealth, on optimal consumption-and income taxes, for an endogenous growth model with public capital. Positional preferences raise the endogenous growth rate if the elasticity of intertemporal substitution is larger than one. Even if labor supply is exogenous, the consumption externalities introduce distortions so long as preferences are wealth-dependent, and with or without the presence of conspicuous wealth.Consequently, optimal consumption-and income taxes differ from zero. Numerical simulations present the effects of fiscal policy on the balanced growth path and transitional dynamics. Keywords and Phrases:Conspicuous consumption, conspicuous wealth, endogenous growth, public capital, optimal consumption tax JEL Classification Numbers: D62, D91, E21, H21, O41 * Corresponding author. Email address: ronald.wendner@uni-graz.at 1 We are indebted to Stella Zilian for valuable research assistance. We also thank Evangelos Dioikitopoulos for insightful debates on a previous version of this paper. We retain sole responsibility for any remaining errors.2

The quest for status and R&D-based growth

“…For the relative wealth specification see, for example, Jeanne (1997, 2001a,b), Futagami and Shibata (1998), Fisher andHof (2005, 2008), Van Long and Shimomura (2004), and Fisher (2010). For frameworks that allow for both specifications see Tournemaine and Tsoukis (2008), Ghosh and Wendner (2014), Ghosh and Wendner (2015), and Wendner (2015).…”

Do Positional Preferences for Wealth and Consumption Cause Inter-Temporal Distortions?

“…An example of such preferences is given by the instantaneous utility function in Ghosh and Wendner (2014). They analyze an economy, in which preferences are specified by…”

“…analyze the impact of positional preferences on growth (they do not consider the distortionary effects). A third closely related paper is Ghosh and Wendner (2014), which considers an endogenous growth model with positional concerns with respect to both consumption and wealth. The paper shows that a preference for wealth is critical for a consumption positionality to be distortionary.…”

Positional Preferences and Efficiency in a Dynamic Economy

“…Positional preferences, manifested through (status-driven) social comparisons, have played an important role in recent research on optimal taxation and public expenditure (e.g., Aronsson and Johansson-Stenman, 2008;Wendner and Goulder, 2008; Eckerstorfer and Wendner, 2013; Kanbur and Tuomala, 2013; Ghosh and Wendner, 2018). Consumption positionality is, in this literature, meant to imply that individuals not only derive utility from their own absolute consumption (broadly defined), as in standard economic models; they also derive utility from their own consumption relative to that of referent others.…”

“…Yet a visit to the parking lot of a suburban shopping mall may tempt an economist to question this independence." 3 A related model was used by Ghosh and Wendner (2018) to analyze optimal income and under which these relative concerns cause distortions, whereby the decentralized outcome diverges from the social optimum.…”