Status and Social Comparisons

• When analysing markets, a range of assumptions are made about the rationality of economic agents involved in the transactions
• Rational


  (in classical economic theory) economic agents are able to consider the outcome of their choices and recognise the net benefits of each one
• Rational agents will select the choice which presents the highest benefits
• Rational agents


  • Consumers
  • Producers
  • Workers
  • Governments
• Consumers act rationally by


  Maximising their utility
• Producers act rationally by


  Selling goods/services in a way that maximises their profits
• Workers act rationally by


  Balancing welfare at work with consideration of both pay and benefits
• Governments act rationally by

  Placing the interests of the people they serve first in order to maximise their welfare
• Groups assumed to act rationally


  • Consumers
  • Producers
  • Workers
  • Governments
• Rationality in classical economic theory is a flawed assumption as people usually don't act rationally
• A firm increases advertising

  Demand curve shifts right
• Demand curve shifting right

  Increases the equilibrium price and quantity
• Marginal utility


  The additional utility (satisfaction) gained from the consumption of an additional product
• If you add up marginal utility for each unit you get total utility
• Consumption, status and value are important topics in economics
• Adam Smith: 'A linen shirt … is, strictly speaking, not a necessary of life. The Greeks and Romans lived, I suppose, very comfortably though they had no linen. But in the present times, through the greater part of Europe, a creditable day-labourer would be ashamed to appear in public without a linen shirt, the want of which would be supposed to denote that disgraceful degree of poverty which, it is presumed, nobody can well fall into without extreme bad conduct.'
• Conspicuous consumption


  Consumption of goods and services for the purpose of displaying income or wealth
• Relative Income Hypothesis


  The idea that people's satisfaction depends on their income relative to others

  
• Positional goods


  Goods that confer status on their owners
• The relevance of interdependent economic value, including social relativity and associated externalities, was explicitly recognised in major post-war discussions and reviews of welfare economics
• Social reference-dependence in economic evaluation, behaviour and experience is a multifaceted issue, reflected in diverse literature and variety of terminology
• Roles of social comparison


  • Subjective perception - direct impact on quality of experience
  • Position-dependent allocation and social functioning
  • Information and motivation
• Positional externalities occur when greater economic consumption by some leads to reduced wellbeing for others
• Positional competition


  1. Cooperative strategy

  2. Competitive strategy

  3. Cost
• Unregulated contests almost always lead to costly positional arms races
• Institutional solutions to positional externalities


  1. Limiting the workweek, regulation of labour

  2. Income and consumption taxes

  3. Mandatory social security contributions

  4. International norms, negotiations
• Positional distortion


  Asymmetry in positionality across economic and non-economic goods
• There is empirical evidence for positional concerns, including the relative income effect, survey evidence, and consumer behaviour

  
• Directly testing for status concerns is challenging, as with observational data it is difficult to separate unobserved intrinsic consumption utility from a desire to signal high income and status
• Field-experimental evidence on platinum credit cards as status goods shows demand increases when the status signalling component is isolated, and that platinum cards are more likely to be used in social situations
• Making a status good more accessible to lower income customers weakens its income signalling power, imposing a positional externality on higher-income consumers, who then demand a more exclusive status good
• Increased self-esteem may have a causal effect reducing the demand for status goods, suggesting self-image and social-image may be substitutes rather than complements
• Social comparison affects reward-related brain activity

  
• Many models of relative comparisons simply assume that the reference standard is exogenously given, but individuals may choose their references as-if optimally, balancing self-improvement and self-enhancement
• Measuring socially relative effects requires assumptions about the reference group, and the nature of relativity
• Social comparisons appear to be relatively spontaneous, effortless, and unintentional, although the cognitive response can be controlled
• The literature generally imposes a single aggregative comparison reference, but an ideal measure would be a weighted mean over the reference group
• Comparison of ability under experimental treatments where counterparts are not useful sources of diagnostic information
• Suggest social comparisons are only mentally "undone" (when recognised as not a useful source of information) after comparisons are made
• Social comparisons appear to be relatively spontaneous, effortless, and unintentional