Discussion Paper

No. 2018-31 | April 11, 2018
Social status, preferences for redistribution and optimal taxation: a survey
(Published in Special Issue The economics of social status)

Abstract

The author reviews recent studies of how social status concerns influence individual preferences for redistribution and impact the design of optimal tax policies. He focuses on two aspects: the relevant dimension over which relative concerns are defined and the different formalizations of the notion of social status that the authors provide.

JEL Classification:

D31, D62, H21, H23

Assessment

  • Downloads: 172

Links

Cite As

Andrea Gallice (2018). Social status, preferences for redistribution and optimal taxation: a survey. Economics Discussion Papers, No 2018-31, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2018-31


Comments and Questions


Anonymous - Invited Reader Comment
April 23, 2018 - 08:09

I appreciate the author’s way to summarize the recent studies in two strands. To the best of my knowledge almost all the recently published articles in major outlets are discussed in this paper. I have two minor things that I wish the author to add. The first is the distinction ...[more]

... between the social status concerns and the Keeping-up-with-Jones (KUJ) preferences. The KUJ preferences are typically modelled by the disutility between the agent’s consumption level and a comparable—Jones’—consumption, where the comparable consumption level may be a mean or median consumption level of a relevant group, and hence all the models with the KUJ utility predict a sort of “reversion” to the comparable consumption level. However, the social status concerns can create negative externality even among the top two consumers, and the shape of the optimal tax schedule for citizens with social status concerns is distinctively different to that for those with the KUJ preferences. Although the paper by itself is comprehensive, I believe adding a few notes on the KUJ preferences would help lay readers.

Second, regarding the preferences for redistribution, it may be worth mentioning those who are “near” the bottom of the socioeconomic status ladder. The Last-Place Aversion (Kuziemko et al., 2014) may lead the low-income individuals to oppose redistribution because it could differentially help the group just beneath them: The workers whose hourly wage is just above the minimum wage may dislike the idea of increasing the minimum wage because it puts them into the “last place”.
I enjoyed reading it.


Andrea Gallice - Response to comment
May 07, 2018 - 11:44

I thank the author of this comment for the two remarks that he raises. I will certaily take them into account while revising the paper.


Anonymous - invited reader
May 08, 2018 - 14:41

In this article the author surveys with a concise and clever manner the relationship between concerns for relative standing and taxation.
The survey develops around 12 recent papers that the authors divide in two groups.
In short, the papers in the first group discuss how concerns for relative ...[more]

... position affect redistributive preferences whereas the papers in the second group deal with optimal policy responses. Importantly, the author underlines the fact that the characteristics of the status bearing object has non trivial consequences on the outcomes of interest under consideration - which are carefully explained.

Overall, I find the survey well written and in interestingly. I do not have any particular major suggestion. I have one minor suggestion. I believe that this survey could be useful also to readers who are not already familiar with the literature. Thus, for those readers, I would suggest an additional footnote (for example), explaining more in detail the difference between ordinal and cardinal concerns (as the author notices, Bilancini and Boncinelli (2008,2014), provide a clear example and simple formulation). Nevertheless as I said, this is a really minor point.


Anonymous - Comment on Social status, preferences for redistribution and optimal taxation: a survey
May 11, 2018 - 08:29

This paper reviews 12 recent articles (published in 2000 or later, out of which six were published in 2012 or later) concerned with the impact of social status concerns on individual preferences for redistribution and design of optimal tax policies. Two aspects are highlighted in the review: (1) the relevant ...[more]

... dimension over which relative concerns are defined and (2) the
functional forms of the notion of social status that the authors provide.

This well-written paper summarises the various models and their implications in a concise yet informative manner. It demonstrates how these models can rationalize patterns of behaviour that would otherwise appear to be suboptimal. It brings out the possible effects of social competition on redistributive policies and the impact of status-seeking behaviour that may call for specific tax interventions by the government. This article would be a good input for policy planners.


Anonymous - Referee Report 1
June 11, 2018 - 08:17

Summary
This paper offers a brief survey on how status-seeking modifies our understanding of positive and normative models of redistributive taxation. Its first part deals with status and preferences for redistribution by individuals; its second one deals with preferences over tax-transfer schemes by a benevolent planner.

Assessment
This is ...[more]

... an interesting, balanced, and competently executed survey. The analysis is well structured and the interpretations offered for the various analytical results are helpful. I think that some revision work is however necessary in order to make this piece more valuable to researchers outside this literature. Some suggestions follow.

Suggestions
Introduction. In order to better motivate the survey, it would help describing the empirical evidence in support of the hypothesis that people desire status and explaining why taking this into theoretical models give insights that cannot be obtained from the standard approach.

P.5, line 5: “…the standard mean via which…” should be replaced with something like: “…the standard way in which…”

P. 5, below: It should be defined what “cardinal” and “ordinal” status mean.

P.7. Lines 9-10 are obscure.

P. 9, top. The author should carefully distinguish the income concepts: market or gross income versus disposable or net income.

P. 11, bottom. “…voters who have the same income support different preferred tax rates.” Please, correct.

P.12. Since the model by Shayo is a bit different from the other ones, the author should explain more carefully his approach. Maybe, it could be related to a distinction between social esteem and self-esteem.

End of Section 2. Here there should be a summary of what we have learnt from the surveyed papers.

Title of Section 3. The current title is ambiguous since optimal taxation can also refer to indirect taxes, while the focus of the survey is direct taxation. I would use “optimal redistribution” or “optimal direct taxation”.

P. 13, middle. “… what matters to a policymaker are not status concerns per se but rather…”. This is too strong: even with given behaviour, taking status concerns into account generally modifies the pattern of marginal utilities and thus prompts the planner to change the tax schedule.

P. 15. Maybe, it could be interesting to notice that under some circumstances social status incentivizes activities that generate positive externalities; then, status seeking improves welfare by counteracting a pre-existing distortion. The classic example is capital accumulation in an endogenous-growth framework (Corneo and Jeanne, On relative wealth effects and the optimality of growth, Economics Letters 54, 1997, 87-92.).

End of Section 3. Here there should be a summary of what we have learnt from the surveyed papers.