Relative Consumption and Endogenous Labour Supply in the Ramsey Model: Do Status-Conscious People Work Too Much?

Abstract: This paper introduces consumption externalities into a Ramsey-type model with endogenous labour supply and homogeneous agents. The instantaneous utility of any consumer is assumed to depend on work effort, own consumption and relative consumption, where the latter determines the individual's status in the society. Appropriate normality conditions with respect to consumption and leisure ensure that at least in the long run status-conscious individuals consume and work too much, compared to the social optimum, and that the capital stock is too high. Public policy can, however, induce the private sector to attain the social optimum by designing an optimal consumption tax policy.;