Essays on the Relativity of Utility

Mujcic, Redzo (2013). Essays on the Relativity of Utility PhD Thesis, School of Economics, The University of Queensland.

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Author Mujcic, Redzo
Thesis Title Essays on the Relativity of Utility
Formatted title
Essays on the relativity of utility
School, Centre or Institute School of Economics
Institution The University of Queensland
Publication date 2013
Thesis type PhD Thesis
Supervisor Paul Frijters
Lana Friesen
Total pages 228
Total colour pages 4
Total black and white pages 224
Language eng
Subjects 1401 Economic Theory
1402 Applied Economics
1403 Econometrics
Formatted abstract
This thesis consists of four essays about the relativity of utility, or interdependent preferences, and the behavioural and economic policy implications that arise.

The first essay analyses the trade-offs that 1,068 subjects make between absolute income and the rank of that income in hypothetical income distributions. Income rank is found to matter independently of absolute income, with greater weight given to rank by males, migrants, and individuals from wealthy families. Rank-sensitive individuals require as much as a 200 percent increase in income to be compensated for going from the top to the bottom of the income distribution. Migrants residing abroad for longer periods of time, and with more affluent job titles, are found to be more likely to compare themselves to others at the destination. A dynamic choice model of compensating incomes predicts the average respondent to need a permanent increase in income of up to 10,000 (70 percent) when moving from a society with a mean income of 14,000 (e.g. Mexico) to a society with a mean income of 46,000 (e.g. the USA). Finally, the form of relative concerns is tested, with income rank being among the three most popular measures that individuals seek to maximise.

The second essay presents a theoretical model of status concerns and migration choices. The effect of income rank on location decisions is studied by developing a relative utility framework of migration intentions between two separate regions. The model differs in several important ways from existing work. Firstly, social status is formulated in the terms of income rank, compared to previous attempts that mainly focus on relative deprivation and average comparison income. Secondly, rational expectations equilibria is explored, where individuals are assumed to understand the migration intentions of all others in the population and hence predict the ex post income distribution within each society. Model simulations are used to identify the partitions of the labour skill and earnings distributions that are most likely to deviate (migrate). The resulting range of simulated results reinforces the complexity in predicting individual choice behaviour when the actions of others are also taken into account.

The third essay combines the early ideas of Veblen (1899) and Becker (1974) to empirically study status concerns in natural social interactions. The essay uses a unique data set consisting of 1,238 social encounters between unrelated individuals to examine the effect of social status on prosocial behaviour. The naturally-occurring data is recorded at carefully selected traffic intersections located in Australia and Europe, whereby the type and class of vehicle observed is used to measure a person's relative status. The chosen social transaction (stopping for others) serves as a rare application of status concerns at play, where the elite in society are able to publicly signal and show off their social rank (by driving an expensive vehicle), while other members of society are given the opportunity to discriminate against this characteristic in return (by acting kindly or unkindly towards them). Overall, I find evidence of (i) status seeking, with owners of expensive and luxury vehicles being significantly less favoured by others of lower status; (ii) status homophily, with the likelihood of observing a prosocial act being 0.36 higher when individuals of similar social status interact, compared to pairings of different status; (iii) gender heterophily, with both men and women discriminating against potential recipients of the same sex, and (iv) an age effect, with elders eliciting a higher degree of sacrifice. The results also indicate the presence of status homophily in peer effects, with decision makers being 15 percentage points more likely to act altruistically after observing a positive social decision made by others of the same status.

The fourth essay develops a simple model of status-seeking over multiple socioeconomic domains by introducing the concept of conspicuous health as an argument in the utility function, in addition to the well-established conspicuous consumption term. Individuals are assumed to experience a negative utility shock as others in their social reference group become healthier; as relevant others increase health inputs such as physical exercise or reduce alcohol and cigarette consumption. I explore the implications of such a utility function for optimal income taxation, where an increase in concerns for conspicuous health is found to have an opposite and offsetting effect on the marginal tax rate, compared to an increase in concerns for conspicuous consumption. Using household panel data from Australia, along with an improved measure of social reference groups that accounts for the `time era' of peers, I find evidence of a comparison health effect.

The thesis concludes with a general discussion of the relevant policy implications, along with some final thoughts on status seeking and a range of applications for social welfare including the potential shape of the status function, social reference groups, individual health, economic inequality, and heterogeneity in status-seeking behaviour.
Keyword Relative utility
Interdependent preferences
Social reference groups
Optimal nonlinear taxation
Simultaneous status races
Choice experiments
Subjective well-being
Panel data methods
Applied microeconometrics

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Created: Thu, 31 Oct 2013, 09:04:51 EST by Redzo Mujcic on behalf of Scholarly Communication and Digitisation Service