Presentation in a seminar:
We study a two-period economy in which agents’ preferences take into account relative economic position. The study builds on a decision theoretic analysis of the social emotions that underly these concerns, i.e., envy and pride, which respond to social losses and gains, respectively. The analysis allows individual differences in their relative importance and, in the tradition of Prospect Theory, summarizes these differences in the geometric properties of the externality function that represents relative outcome concerns. Our main result is that envy leads to conformism in consumption behavior and pride to diversity. We thus establish a link between emotions that are object of study in psychology and neuroscience, and important features of economic variables, in the first place the equilibrium distribution of consumption and income. This research provides a tool to relate experimental and empirical studies of individual preferences for relative position and important features of macro data.