beyond gdp the quest for a measure of social welfare this paper critically examines the various approaches to the measurement of individual well being and social welfare that have been considered for the construction of alternatives to gdp special attention is devoted to recent developments in the analysis of sustainability in the study of happiness in the theory of social choice and fair allocation and in the capability approach it is suggested in the conclusion that although convergence toward a consensual approach is not impossible for the moment not one but three alternatives to gdp are worth developing jel i31 e23 e01

on the concavity of the consumption function at least since keynes 1935 many economists have had the intuition that the marginal propensity to consume out of wealth declines as wealth increases nonetheless standard perfect certainty and certainty equivalent versions of intertemporal optimizing models of consumption imply a marginal propensity to consume that is unrelated to the level of household wealth we show that adding income uncertainty to the standard optimization problem induces a concave consumption function in which as keynes suggested the marginal propensity to consume out of wealth or transitory income declines with the level of wealth

resource allocation affluence and deadweight loss when relative consumption matters abstract we explore the link between affluence and well being using a simple general equilibrium model with a pure veblen good individuals derive utility from the pure veblen good based solely on how much they consume relative to others in equilibrium consumption of the pure veblen good is the same for everyone so the veblen good contributes nothing to utility hence resources devoted to the veblen good provide us with a measure of deadweight loss we ask under what preference conditions does the proportion of productive capacity devoted to the pure veblen good increase as an economy becomes more affluent in a relatively general preference framework we derive a sufficient condition for which the veblen good crowds out standard forms of consumption and leisure resulting in an inverse relationship between affluence and utility with additional structure on the model we are able to fully characterize the behavior of deadweight loss and utility as an economy becomes more affluent

estimating intertemporal allocation parameters using synthetic residual estimation we present a novel structural estimation procedure for models of intertemporal allocation this is based on modelling expectations errors directly we refer to it as synthetic residual estimation sre the flexibility of sre allows us to account for measurement error in consumption and for heterogeneity in intertemporal allocation parameters an investigation of the small sample properties of the sre estimator indicates that it dominates generalized method of moments gmm estimation of both exact and approximate euler equations in the case when we have short panels and noisy consumption data we apply sre to two panels drawn from the panel study of income dynamics psid and estimate the joint distribution of the discount factor and the elasticity of intertemporal substitution we reject strongly homogeneity of the discount factor and the elasticity of intertemporal substitution we find that on average the more educated are more patient and less willing to substitute intertemporally than the less educated within education strata patience and willingness to substitute are positively correlated 2010 the review of economic studies limited

an approximate consumption function this paper proposes an approximation to the consumption function in the buffer stock model the approximation is based on the analytic properties of the consumption function in the buffer stock model in such model the consumption function is increasing and concave and its derivative is bounded from above and below we compare the approximation with the consumption function obtained using the endogenous grid point algorithm and show that using the former or the latter for estimating the euler equation leads to very similar results

the nature of precautionary wealth abstract this paper uses the panel study of income dynamics to provide some of the first direct evidence that wealth is systematically higher for consumers with predictably greater income uncertainty however the apparent pattern of precautionary wealth is not consistent with a standard parameterization of the life cucle model in which consumers are patient enough to begin saving for retirement early in life wealth is estimated to be far less sensitive to uncertainty than implied by that model instead our results suggest that over most of their working life time consumers behave in accordance with the buffer stock models of saving described in carroll 1992 1997 or deaton 1991 in which consumers hold wealth principally to insulate consumption against near term fluctuations in income

welfare egalitarianism in non rival environments we study equity in economies where a set of agents commonly own a technology producing a non rival good from their private contributions a social ordering function associates to each economy a complete ranking of the allocations we build social ordering functions satisfying the property that individual welfare levels exceeding a legitimate upper bound should be reduced combining that property with efficiency and robustness properties with respect to changes in the set of agents we obtain a kind of welfare egalitarianism based on a constructed numerical representation of individual preferences

status seeking and material affluence evaluating the hirsch hypothesis abstract when individuals hold a preference for high relative consumption competition to achieve social status can lead to inefficiently high levels of production and consumption contributing to natural resource depletion and environmental degradation in the 1970s fred hirsch argued that an increasing portion of expenditure is allocated to status seeking as average income rises this paper critiques this hypothesis from two points of view first we note examples from the historical and anthropological literatures suggesting that status seeking is often important in societies with relatively low incomes second we consider a set of analytical models that focus on the economic consequences of status seeking when social status is defined in terms of the algebraic difference between an individual s consumption of a status good and the average consumption level in society hirsch s hypothesis holds true and growth in the level of productivity and output can lead to declines in human welfare if on the other hand status is linked to the ratio of individual and average consumption hirsch s hypothesis is valid only if social status and non status goods are poor substitutes the paper also considers two cases in which social status is defined in terms of the amount of time people devote to status oriented activities under this assumption productivity growth leaves time use unchanged though the value of time devoted to status signaling increases in proportion to total expenditure

a test of conspicuous consumption visibility and income elasticities abstract this paper shows that consistent with a signaling by consuming model a la veblen income elasticities can be predicted from the visibility of consumer expenditures we outline a stylized conspicuous consumption model where income elasticity is endogenously predicted to be higher if a good is visible and lower if it is not we then develop a survey based measure of expenditure visibility ranking different expenditures by how noticeable they are to others finally we show that our visibility measure predicts up to one third of the observed variation in elasticities across consumption categories in u s data

fair production and allocation of an excludable nonrival good we study fairness in economies with one private good and one partially excludable nonrival good a social ordering function determines for each profile of preferences an ordering of all conceivable allocations we propose the following free lunch aversion condition if the private good contributions of two agents consuming the same quantity of the nonrival good have opposite signs reducing that gap improves social welfare this condition combined with the more standard requirements of unanimous indifference and responsiveness delivers a form of welfare egalitarianism in which an agent s welfare at an allocation is measured by the quantity of the nonrival good that consumed at no cost would leave her indifferent to the bundle she is assigned

comparing solution methods for dynamic equilibrium economies this paper compares solution methods for dynamic equilibrium economies the authors compute and simulate the stochastic neoclassical growth model with leisure choice using undetermined coefficients in levels and in logs finite elements chebyshev polynomials second and fifth order perturbations and value function iteration for several calibrations the authors document the performance of the methods in terms of computing time implementation complexity and accuracy and they present some conclusions about their preferred approaches based on the reported evidence

social orderings for the assignment of indivisible objects in the assignment problem of indivisible objects with money we study social ordering functions which satisfy the requirement that social orderings should be independent of changes in preferences over infeasible bundles we combine this axiom with efficiency consistency and equity axioms our result is that the only social ordering function satisfying those axioms is the leximin function in money utility

a theory of the consumption function with and without liquidity constraints fifteen years ago milton friedman s 1957 treatise a theory of the consumption function seemed badly dated dynamic optimization theory had not been employed much in economics when friedman wrote and utility theory was still comparatively primitive so his statement of the permanent income hypothesis never actually specified a formal mathematical model of behavior derived explicitly from utility maximization instead friedman relied at crucial points on intuition and verbal descriptions of behavior although these descriptions sounded plausible when other economists subsequently found multiperiod maximizing models that could be solved explicitly the implications of those models differed sharply from friedman s intuitive description of his model furthermore empirical tests in the 1970s and 1980s often rejected these rigorous versions of the permanent income hypothesis in favor of an alternative hypothesis that many households simply spent all of their current income today with the benefit of a further round of mathematical and computational advances friedman s 1957 original analysis looks more prescient than primitive it turns out that when there is meaningful uncertainty in future labor income the optimal behavior of moderately impatient consumers is much better described by friedman s original statement of the permanent income hypothesis than by the later explicit maximizing versions furthermore in a remarkable irony much of the empirical evidence that rejected the permanent income hypothesis as specified in tests of the 1970s and 1980s is actually consistent both with friedman s original description of the model and with the new version with serious uncertainty there are four key differences between the explicit maximizing models

saving and liquidity constraints this paper is concerned with the theory of saving when consumers are not permitted to borrow and with the ability of such a theory to account for some of the stylized facts of saving behavior the models presented in the paper seem to account for important aspects of reality that are not explained by traditional life cycle models copyright 1991 by the econometric society

fair income tax fairness is a key concept in redistribution issues in this paper we study how particular requirements of fairness can shed light on the design of the optimal income tax schedule we consider a population of heterogeneous individuals or households who differ in two respects first they have unequal skills and therefore unequal earning abilities second they differ in terms of their preferences about consumption and leisure and as a consequence typically make different labour time choices both kinds of differences generate income inequalities we study how to justify and compute a redistribution income tax in this context redistribution through an income tax usually entails distortions of incentives but the resulting efficiency loss has to be weighed against potential improvements in the fairness of the distribution of resources we address this efficiency equity trade off here by constructing social preferences which obey the standard pareto principle in addition to fairness conditions

conspicuous consumption and race using nationally representative data on consumption we show that blacks and hispanics devote larger shares of their expenditure bundles to visible goods clothing jewelry and cars than do comparable whites these differences exist among virtually all subpopulations are relatively constant over time and are economically large although racial differences in utility preference parameters might account for a portion of these consumption differences we emphasize instead a model of status seeking in which conspicuous consumption is used as a costly indicator of a household s economic position using merged data on race and state level income we demonstrate that a key prediction of the status signaling model that visible consumption should be declining in reference group income is strongly borne out in the data for each racial group moreover we show that accounting for differences in reference group income characteristics explains most of the racial difference in visible consumption

is commodity taxation unfair abstract in a model where agents have unequal skills and heterogeneous preferences about consumption goods and leisure this paper studies how to combine commodity taxes and non linear income tax it proposes a particular social welfare function on the basis of fairness principles it then derives a simple criterion for evaluating the social welfare consequences of various tax schedules under the proposed approach the optimal tax should have no commodity tax for some range of consumptions and income redistribution would feature high subsidies to the working poor it is also shown that even when the income tax fails to be optimal commodity taxes may not improve social welfare

two criteria for social decisions abstract this paper studies the ethical underpinnings of two social criteria which are prominent in the literature dealing with the problem of evaluating allocations of several consumption goods in a population with heterogenous preferences the pazner schmeidler criterion pazner schmeidler egalitarian equivalent allocations a new concept of economic equity quart j econ 92 1978 671 687 and the egalitarian walras criterion fleurbaey and maniquet utilitarianism versus fairness in welfare economics in m salles j a weymark eds justice political liberalism and utilitarianism themes from harsanyi and rawls cambridge university press cambridge 1996 forthcoming are prima facie quite different but it is shown here that these criteria are related to close variants of the fairness condition that an allocation is better when every individual bundle in it dominates the average consumption in another allocation in addition the results suggest that the pazner schmeidler criterion can be viewed as the best extension of the walrasian criterion to non convex economies

running to keep in the same place consumer choice as a game of status if individuals care about their status defined as their rank in the distribution of consumption of one positional good then the consumer s problem is strategic as her utility depends on the consumption choices of others in the symmetric nash equilibrium each individual spends an inefficiently high amount on the status good using techniques from auction theory we analyze the effects of exogenous changes in the distribution of income in a richer society almost all individuals spend more on conspicuous consumption and individual utility is lower at each income level in a more equal society the poor are worse off

increasing income inequality external habits and self reported happiness a large literature has documented an increase in income equality in the united states over the past several decades see for example david h autor lawrence f katz and melissa s kearney 2006 at the same time real aggregate income has risen markedly and most socioeconomic groups have experienced at least some rise in real purchasing power standard models of consumption which typically assume that an individual s utility is based only on her own consumption would predict that these gains have led to higher levels of happiness for all groups albeit with greater increases for some more than others economists have long recognized however that an individual s utility may depend not only on the level of her own consumption but also on how that level compares with the consumption of others if preferences are characterized by such external habits then the observed widening of the income distribution may have implications for the happiness of different groups that go beyond those associated with the changes in their respective incomes this study combines data from two sources to document the evolution of reported levels of happiness for different socioeconomic groups over the past 25 years and to explore whether those levels have been affected by the changing relative position of these groups within the habit persistence and the macroeconomy

sharing the cost of a public good an incentive constrained axiomatic approach we study the problem of provision and cost sharing of a public good in large economies where exclusion complete or partial is possible we search for incentive constrained efficient allocation rules that display fairness properties population monotonicity says that an increase in population should not be detrimental to anyone demand monotonicity states that an increase in the demand for the public good in the sense of a first order stochastic dominance shift in the distribution of preferences should not be detrimental to any agent whose preferences remain unchanged under suitable domain restrictions we give an explicit characterization of all incentive constrained efficient allocation rules we then show that there exists a unique incentive constrained efficient and demand monotonic allocation rule the so called serial rule in the binary public good case the serial rule is also the only incentive constrained efficient and population monotonic rule

equality of resources implies equality of welfare if one is an egalitarian should one try to equalize resources available to agents or to equalize their welfares with a suitably general conception of what resources are these two conceptions cannot be distinguished an allocation mechanism is defined on a space of economies and is required to satisfy various axioms that are necessary conditions for equalizing resources among a population the unique mechanism satisfying these axioms on a large domain of economies is the one that allocates commodities so as to equalize utilities of the agents methodologically the theorem is a generalization of bargaining theory because the mechanisms are defined on commodity space

what is benefit taxation abstract benefit taxation is a system in which individuals are taxed according to the benefits they receive from public expenditures this paper describes an alternative to the standard lindahl method of determining the distribution of individual benefits from government provided public goods and uses this alternative to calculate benefit taxes this alternative avoids some of the paradoxial features of lindahl pricing and generates outcomes in which all consumers benefit from reduced costs of providing public goods an illustrative calculation shows that benefit taxes defined in this way may be quite regressive

egalitarian equivalent cost sharing of a public good in an economy with one public and one private good egalitarian equivalent cost sharing consists of finding the highest public good level x such that consuming x for free yields a feasible utility distribution the corresponding feasible allocation typically unique called egalitarian equivalent is in the core of the economy conversely any cost sharing method satisfying pareto optimality cost monotonicity nobody suffers a utility loss if the production technology improves upon ceteris paribus and individual rationality no single agent coalition objects or no private transfers no agent receives a positive amount of private good must select an egalitarian equivalent allocation in every economy copyright 1987 by the econometric society

second third and higher order consumption functions a precautionary tale abstract no analytic solution exists to the consumption problem of an agent who faces uninsurable income shocks though perturbation methods can be used to derive approximate solutions this paper shows it is straightforward to extend the well known second order consumption function to third order however for every n there is a threshold interest rate below which the nth order correction diverges this puts a bound on the accuracy that can be achieved with perturbation methods even a second order consumption function can perform spectacularly worse than a zeroth order function that disregards precautionary saving and this cannot be rectified by going to higher orders

information shocks and precautionary saving abstract skinner s 1988 risky income life cycle consumption and precautionary savings journal of monetary economics 22 237 255 second order approximation to the consumption function under crra utility is generalized to accommodate any structure of uninsurable income risk to second order a future income shock will induce precautionary saving in the present that depends on the variance of the expectation of the income shock at each intervening period however the expected rate of consumption growth depends only on the currently perceived variance of the expected present value of future income in a finite horizon model precautionary saving produces a hump shaped lifecycle profile of mean consumption primarily because the variance of future income decreases with age but the lifecycle dynamics of total wealth also affect the shape of the profile for a markov income process with autocorrelations on the order of 0 9 or less the second order approximation performs surprisingly well for common parameter choices from the literature but it does poorly as the autocorrelation approaches 1

nash equilibrium and welfare optimality if is a set of social alternatives a social choice rule scr assigns a subset of a to each potential profile of individuals preferences over a where the subset is interpreted as the set of welfare optima a game form or mechanism implements the social choice rule if for any potential profile of preferences 1 any welfare optimum can arise as a nash equilibrium of the game form implying in particular that a nash equilibrium exists and 2 all nash equilibria are welfare optimal the main result of this paper establishes that any scr that satisfies two properties monotonicity and no veto power can be implemented by a game form if there are three or more individuals the proof is constructive

international comparisons of living standards by equivalent incomes we propose a measure of living standards for international comparisons based on gdp per capita the measure incorporates corrections for international flows of income labor risk of unemployment healthy life expectancy household demography and inequalities the method for comparing populations that differ in some non income dimension consists of computing the equivalent variation of income that would make each population indifferent between its current situation and a reference situation with respect to the non income dimension this is applied to 24 oecd countries the obtained ranking of countries differs substantially from the gdp ranking

emulation inequality and work hours was thorsten veblen right we investigate the manner in which a desire to emulate the rich influences individuals allocation of time between labour and leisure greater inequality inducing longer work hours as a result data on work hours in ten countries over the period 1963 98 show that greater inequality is indeed associated longer work hours these veblen effects are large and the estimates are robust using country fixed effects and other specifications because consumption inequality is a public bad a social welfare optimum cannot be implemented by a flat tax on consumption but may be accomplished by more complicated progressive consumption taxes at the close of the nineteenth century thorsten veblen proposed what he termed pecuniary emulation as the foundation of a theory of consumption spending he maintained is driven by relative status considerations that is by the desire to be a particular type of person as much as bythedesire to enjoytheconsumer goodsper se the joneses with whom one had to keep up were not the neighbours but the rich theirleveloflivingbecamethenever attainableobjectiveinaconsumptionarmsrace among the less well to do in the theory of the leisure class he wrote the motive is emulation the stimulus of an invidious comparison especially in any community in which class distinctions are quite vague all canons and reputability and decency and all standards of consumption are traced back by insensible gradations to the usages and thoughts of the highest social and pecuniary class the wealthy leisure class 1934 p 81 while valued by some economists as capturing common sense aspects of consumption as a form of status seeking veblen s view of social preferences was soon eclipsed by the simpler and more tractable neoclassical theory of the consumer relegated to the underworld of economics veblen s ideas have nonetheless resonated over the ensuing years in the writing of duesenberry 1949 leibenstein 1950 and galbraith 1958 at the middle of the past century and schor 1998