On limiting the market for status signals
TL;DR: In this paper, the impacts of tax policy and benefits on the signalling equilibrium are considered, and the benefits of a Pareto-improving tax policy are discussed. But the authors do not consider the impact of tax on the signaling equilibrium.
About: This article is published in Journal of Public Economics.The article was published on 1994-01-01 and is currently open access. It has received 265 citations till now. The article focuses on the topics: Tax policy & Inefficiency.
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TL;DR: In this article, the effets de positionnement, evalues par rapport au "first best", dans un duopole avec differenciation verticale, are analyzed.
Abstract: Nous analysons les effets de positionnement, evalues par rapport au « .first best », dans un duopole avec differenciation verticale. Des problemes de positionnement perturbent l’allocation des consommateurs entre les differentes varietes, tout comme la qualite moyenne. Si l’effet externe est suffisamment important, la perte de bien-etre qui en resulte est croissante avec l’importance de l’externalite elle-meme. L’effet benefique d’une regulation par un standard de qualite minimum est analyse.
9 citations
TL;DR: In this article, the authors discuss the pricing of a superior good based on its "signalling value" and explain why in China and some other Asian countries the prices of luxury goods are extremely expensive when they are first marketed, then fall dramatically and discontinuously afterwards, when marginal costs decline to below the critical point and the goods become more popular.
Abstract: . We discuss the pricing of a superior good based on its ‘signalling value’. Our model and analysis offer a different explanation of why in China and some other Asian countries the prices of luxury goods are extremely expensive when they are first marketed, then fall dramatically and discontinuously afterwards, when marginal costs decline to below the critical point and the goods become more popular.
9 citations
TL;DR: In this article, the authors explore how consumers' belief-dependent social image concerns can affect firm strategic choices in a product market setting, and explore the implications for consumer demand and firm profits.
Abstract: This paper explores how consumers’ belief-dependent social image concerns can affect firm strategic choices in a product market setting. We consider a theoretical framework with incomplete information where a profit-maximizing monopolist sets a price for its product, taking into account that consumers care about the belief that others hold about the product’s popularity. Throughout our analysis, we highlight the close connection between our dynamic psychological game and the literature on network effects. We show in particular that belief-dependent social image concerns generate equilibrium price distortions that do not arise in a network effect setting, and we explore the implications for consumer demand and firm profits.
9 citations
TL;DR: In this paper, a signaling model was proposed to measure the market value of non-market goods by using a revealed-preference approach, and the authors used this model to obtain welfare implications and perform a counterfactual analysis.
Abstract: Although non-market goods are not directly allocated through markets, some of these goods are allocated through markets in an indirect fashion. Such is the case with conspicuous consumption: people buy market goods (e.g., clothing) to signal their wealth and then increase the probability of obtaining some non-market goods (e.g., admiration). We are the first to exploit that relationship to measure the market value of those non-market goods by using a revealed-preference approach. We estimate a signaling model using nationally representative data on consumption in the US. We then use this model to obtain welfare implications and perform a counterfactual analysis. Our estimates suggest that for each dollar spent on clothing and cars, the average household obtains approximately 35 cents in net benefits from non-market goods. The signaling mechanism seems to be a relatively efficient allocation mechanism because it attains almost 90% of the full potential benefits from non-market goods. The unattained benefits give an upper bound to the potential gains from economic policy (e.g., a tax on observable goods). The counterfactual analysis suggests that the proportional tax rate on observable goods that would correct the positional externality is in the order of 40%. Additionally, we calculate the unique non-linear tax schedule that would fully correct the externality. Finally, we show that accounting for the consumption of these non-market goods increases the Gini index of consumption inequality by almost 4%.
8 citations
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TL;DR: The optimality of allowing firms to observe signals of workers’ characteristics in an optimal taxation framework is analyzed and it is shown that it is always optimal to prohibit signals that disclose information about differences in the intrinsic productivities of workers.
Abstract: In this paper we analyze the optimality of allowing firms to observe signals of workers’ characteristics in an optimal taxation framework. We show that it is always optimal to prohibit signals that disclose information about differences in the intrinsic productivities of workers like mandatory health exams and IQ tests, for example. On the other hand, it is never optimal to forbid signals that reveal information about the comparative advantages of workers like their specialization and profession. When signals are mixed (they disclose both types of information), there is a trade-off between efficiency and equity. It is optimal to prohibit signals with sufficiently low comparative advantage content.
8 citations
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TL;DR: In this paper, the authors model the negative self-characterizations of welfare recipients as a form of social stigma, and use a utility maximization model to predict the impact of welfare programs on the low-income population.
Abstract: Perhaps the most basic assumption of the economic theory of consumer demand is that "more is better than less." Virtually all of the major propositions of consumer theory can, in a certain sense, be derived from the assumption that "goods are good." Interestingly, however, this tenet seems to be violated by the behavior of many individuals in the low-income population, for many turn out to be eligible for a positive welfare benefit but do not in fact join the welfare rolls. For example, it has been estimated that in 1970, only about 69 percent of the families eligible for AFDC (Aid to Families with Dependent Children) participated in the program (see Richard Michel, 1980). The corresponding percentage for AFDC-U, the program for which families with an unemployed male are eligible, was only 43 percent and the participation rate in the Food Stamp Program was only 38 percent (see Maurice McDonald, 1977). This phenomenon has puzzled many investigators because such individuals do not locate on the boundaries of their budget sets. Consequently, most investigators ignore the problem when studying the effects of welfare programs on behavior. In this paper, this seemingly irrational rejection of an increase in income is modeled as resulting from welfare stigma -that is, from disutility arising from participation in a welfare program per se.1 The existence of stigma has been amply documented in the sociological literature (Patrick Horan and Patricia Austin, 1974; Lee Rainwater, 1979), where interviews of recipients have often uncovered feelings of lack of self-respect and " negative self-characterizations" from participation in welfare. Nevertheless, this phenomenon has not been modeled, and many questions consequently remain. When is the disutility of participation strong enough to prevent participation? Shouldn't we expect individuals to weigh the disutility of participation against the potential benefit in their decisions? What is the elasticity of participation with respect to the potential benefit? Also, in a slightly different vein, how are the work disincentives of welfare affected by stigma? These questions have been given scant attention by economists, yet they are crucial for our ability to predict the impact of various welfare programs on the lowincome population. Here these questions are addressed by modeling nonparticipation as a utility-maximizing decision. The model is developed and estimated for the AFDC program.2 The model posits an individual utility function containing not just disposable income, but
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TL;DR: In this paper, the authors examine a variety of empirical evidence that relates to this proposition about the firm's internal wage structure and conclude that the competitive wage structure within a firm must be one in which individual wage differences understate individual differences in marginal products.
Abstract: Status is, like Coase's social costs, a reciprocal phenomenon. Given that one person's gain in status can occur only at the expense of a loss in status for others, and that workers are free to choose their coworkers, it follows that the competitive wage structure within a firm must be one in which individual wage differences understate individual differences in marginal products.' The purpose of this paper is to examine a variety of empirical evidence that relates to this proposition about the firm's internal wage structure. The paper is organized as follows. Section I briefly summarizes the theoretical considerations that govern competitive wage determination when status matters to people and firms are viewed as voluntary associations of workers. Section II then confronts the predictions of Section I by examining pay and productivity schedules for a group of sales occupations for which these schedules are relatively easily observed. Section II also examines the relationship between wages and productivity for a sample of university professors, an occupation in which individual productivity differences are, for a variety of obvious reasons, relatively more difficult to measure. All of the evidence examined is consistent with the hypothesis that, within firms, wage rates vary substantially less than do individual productivity values. Section III discusses additional observations and evidence that bear on this same hypothesis. It suggests that the implicit market for status may strongly influence the ways in which firms are organized to carry out the tasks they perform. Section IV concludes by considering the claim that egalitarian internal wage structures arise because of "equity considerations." It argues that the concept of equity appears very closely linked to the concept of status, and suggests a strategy for assigning monetaty value to the equity considerations that so often dominate public policy decisions.
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