Richard C. Barnett

Choosing to Keep up with the Joneses

Does a rise in income inequality induce people to work harder to stay in the rat race (“keep up with the Joneses”) or to simply drop out? We investigate this issue in a simple new framework in which heterogeneous ability agents get extra utility if their consumption keeps up with the economy’s average. The novelty is that agents are allowed to choose whether they want to stay in or drop out of the rat race. We show that sufficiently high ability agents choose to keep up with the Joneses and they enjoy higher consumption but lower leisure than those who don’t. When income inequality rises in a mean-preserving manner, average leisure in the economy may fall. Our analysis touches on the question, why are Americans working so much compared to the Europeans? We posit that higher income inequality in the US, by inducing more people to join the rat race there, may be partly responsible for the transatlantic leisure divide.

Resurrecting Equilibria through Cycles

In an overlapping generations model, momentary equilibria are defined as points that lie on the intergenerational offer curve, i.e., they satisfy agents’ optimality conditions and market clearing at any date. However, some dynamic sequences commencing from such points may not be considered valid equilibria because they asymptotically violate some economic restriction of the model. The literature has always ruled out such paths. This paper studies a pure-exchange monetary overlapping generations economy in which real balances cycle forever between momentary equilibrium points. The novelty is to show that segments of the offer curve that have been previously ignored, can in fact be used to produce asymptotically valid cyclical paths. Indeed, a cycle can bestow dynamic validity on momentary equilibrium points that had erstwhile been classified as dynamically invalid.

Barriers to Capital Accumulation and the Incidence of Child Labor

The World Bank documents an inverse relationship between GDP per-capita and child labor participation rates. We construct a life-cycle model with human and physical capital in which parents make a time allocation choice for their child. The model considers two features that have shown potential in explaining differences in states of development across nations. These are: i) a minimum consumption requirement, and ii) barriers to physical capital accumulation. We find the introduction of capital barriers alone is not enough to replicate the aforementioned observation by the World Bank. However, we find the interplay of a minimum consumption requirement and barriers to capital may enhance our understanding of child labor, human capital, and the poverty of nations. Additionally, we find support for policies aimed at reducing capital barriers as means to reduce child labor over an out and out ban on it.

Do the Joneses make you financially vulnerable

This paper studies a model economy populated with agents of differing incomes that get a utility boost when their consumption keeps up with their neighbors, the proverbial Joneses. The resulting utility function is non-concave. In this setup, participation in a fair consumption lottery has the potential to make some agents ex-ante better off but more financially vulnerable. More people of different incomes join the lottery pool when the ‘kick’ from keeping up increases. Worsening income inequality may increase the number of financially vulnerable people. The analysis offers broad-brushstroke insights into the connection between inequality and financial vulnerability. This paper studies a model economy populated with agents of differing incomes that get a utility boost when their consumption keeps up with their neighbors, the proverbial Joneses. The resulting utility function is non-concave. In this setup, participation in a fair consumption lottery has the potential to make some agents ex-ante better off but more financially vulnerable. More people of different incomes join the lottery pool when the ‘kick’ from keeping up increases. Worsening income inequality may increase the number of financially vulnerable people. The analysis offers broad-brushstroke insights into the connection between inequality and financial vulnerability.

Voting for Income‐Immiserizing Redistribution in the Meltzer–Richard Model

This paper argues that income received via redistributive transfers, unlike labor income, requires no direct sacrifice of leisure; this makes it attractive to many voters even if it leaves them poorer. This point is made within the classic Meltzer and Richard (1981) model wherein heterogeneous voters evaluate an income-redistribution program that finances a lump-sum transfer to all via a distorting income tax. The political-equilibrium policy under majority rule is the tax most preferred, utility-wise, by the median voter. She, and many poorer voters, may support income redistribution that, ironically, leaves them poorer in income terms but with higher utility.

Immiserizing Redistribution: Voting to Get Poorer in the Meltzer-Richard Model

In the classic Meltzer and Richard (1981) model, the canonical model of income redistribution in democracies, voters, heterogeneous on the sole dimension of idiosyncratic productivity, evaluate an income-redistributive program that pays everyone a lump-sum income subsidy financed by a distorting income tax levied on all. The political-equilibrium policy under majority rule is the tax rate most preferred (in a utility sense) by the median voter. The larger the gap between the median and mean income, the larger is the scale of income redistribution favored by the median voter. But does the median voter actually end up with more income post redistribution? We establish, somewhat ironically, that the median voter (and many poorer voters) in the Meltzer-Richard model may support income redistribution that leaves them poorer in income terms. Indeed, the basis for their support may not be more income but more leisure. The analysis spotlights the fact that transfer income, unlike labor income, requires no direct sacrifice of leisure.