Choosing to Keep Up with the Joneses and Income Inequality

We study a variant of the conventional keeping-up-with-the-Joneses setup in whichheterogeneous-ability agents care both about consumption and leisure and receive anutility premium if their consumption exceeds that of the Joneses’. Unlike the conventionalsetup in which all agents are assumed to want to participate in the rat race ofstaying ahead of the Joneses, our formulation explicitly permits the option to drop out.Mean-preserving changes in the spread of the underlying ability distribution, via itseffect on the economy-wide composition of rat-race participants and drop-outs, haveimportant consequences for induced distributions of leisure and income, consequencesthat are unobtainable using conventional keeping-up preferences.[...]