Big If True

One assumption people sometimes implicitly make when discussing optimizing social welfare is that when someone is more productive and thereby earns an additional dollar, it helps them without hurting anyone else. To put it in economic terms, income boosts your utility without any externalities.

However, it seems plausible that at least some of the utility you gain from consumption is positional - that is its utility you gain not by spending, but by spending more than your peers.

This hypothesis is, in my amateur opinion, one of the most under-appreciated ideas in the field of economics. If true, the idea would render large swarths of economic analysis useless. This isn't to say economists aren't aware of this issue - just that the vast majority of them ignore it in their analyses even when its clearly relevant.

We'll get to some concrete implications at the end. First, let's take a look at the evidence for this theory.

Suicides and Income

Utility can be hard to measure, but one proxy we can use is suicide rates in different groups since, presumably, people with lower utility are more likely to commit suicide. For instance, if income boosts utility, we'd expect people with higher incomes to be less likely to commit suicide. This prediction happens to be true.

Likewise, more income in an area generally makes an area nice to live in because it tends to mean better maintained infrastructure, higher-quality schools, and other benefits. And, indeed, suicides are less likely in counties with higher incomes.

However, the naive economic model that income is always good claims that when we try to predict suicide rates with both household income and county-wide income, we'll find both decrease suicides. This is not the case. Instead, we find that household income predicts lower suicide while county-income predicts higher suicide Relative status and well-being: Evidence from US suicide deaths. The researchers find, for instance, that you earn 10% more and the rest of the county earns 10% more, your odds of suicide actually increase by 3%. While other estimates in the study, find it would decrease suicide by a bit. While merely correlational, this is far more consistent with the theory that most utility from income is zero-sum than with the default theory that income just simply boosts individual and social welfare, alike.

The natural alternative hypothesis is that some third variable causes both higher incomes and higher suicide rates. The researchers investigated the most obvious confounder: cost of living. After controlling for housing prices, they find (1) high home prices actually negatively correlate with suicides and (2) after controlling for housing costs the effect of county income on suicides actually increases.

Being merely correlational, this still isn't a slam-dunk argument but while I can think of lots of reason why higher neighbor incomes should reduce suicides (better social services, lower crime, etc), I have a really hard time coming up with plausible reasons for the reverse with the exception of the positional-spending hypothesis. For this reason, I'm tempted to say that the slopes found here actually bound the causal effect size, which would suggest pretty much all utility derived from income among the middle and upper classes is positional.

Lottery Losers

More evidence comes from lottery losers.

The Dutch, for instance, have an interesting lottery system, where they partition the country into "neighborhoods" of roughly 20 households each. Then, each week, one neighborhood is selected as the winner and each ticket-buying households wins ~$15,000.

Conventional economic wisdom predicts winners will mostly buy consumer durables, and this prediction is borne out, with consumers particularly favoring cars - though, they also spent more in other categories.

The interesting conclusion is that the neighbors of winners were also significantly more likely to buy a car but not more likely to spend more on other things.

For instance, winners were 9% more likely to buy a new car since the lottery date while neighbors were 36% more likely. Neighbors increased the number of cars they owned by 10% while winners didn't increase the number at all. On the other hand, winners tended to buy cars 1.1 years newer, while neighbors bought cars ~0.3 years newer Kuhn.

This all perfectly aligns with the theory that car purchases are largely regulated by status-seeking (positional) behavior rather than naive utility maximization.

Predictably, then, researchers have also found that neighbors of lottery winners are more likely to go bankrupt Agarwal and that this effect increases with the size of the lottery winnings.

They also look into these bankruptcies and find that the larger the lottery winning the more value the filer had in "conspicuous" goods (houses, cars, etc) as opposed to "inconspicuous" goods (cash, financial assets, etc), where they find no effect. In particular, they find that a 1% increase in lottery winnings leads to 0.27% and 0.21% increases in the house and car values of their neighbor's bankruptcy reports.