Status-seeking, income taxation and efficiency

Abstract

It is well-known that status-seeking produces distortions in consumption. Competition to achieve status leads to over-consumption of those goods which confer status. It has been found that taxing such goods may even lead to Pareto improvements. In this paper we extend a model of status, which relies on a signalling equilibrium approach, to include the individual labour supply decision and an income tax. We show that a Pareto-improving income tax can exist even with the simplest tax/benefit scheme. A number of results follow. The model is extended to a two-period analysis, to accommodate the reputation-building element of status achievement, without altering the conclusions.