DURABLE CONSUMPTION AS A STATUS GOOD: A STUDY OF NEOCLASSICAL CASES

1. Introduction

Interactions between individuals and economy-wide aggregates or social groups are a per-
vasive phenomenon. Recent researchers who have explored this aspect of economic life with
respect to an individual’s social status and welfare include Easterlin (1974, 1995), Clark
and Oswald (1996), Oswald (1997), and Frank (1997), to name just a few. One aspect of
this question that has drawn increasing attention in the last decade or so is the issue of
how social status affects overall economic performance, including its implications for the
long-run rate of economic growth and potential public policy interventions. Examining the
recent literature in this area, we observe that there are two primary ways in which status
is modelled in macroeconomic settings. The first approach, represented by authors such
as Gali (1994), Persson (1995), Harbaugh (1996), Rauscher (1997b), Grossmann (1998),
Ljungqvist and Uhlig (2000), and Fisher and Hof (2000a, b) specifies that status arises
from an individual’s comparison—in terms of his instantaneous preferences—of his own
consumption to some economy-wide measure of aggregate or average consumption, which
can be modelled as an agent’s consumption relative to this macroeconomic variable. The
second approach, adopted by Corneo and Jeanne (1997, 2001a, 2001b), Rauscher (1997a),
Futagami and Shibata (1998), Fisher (2004a, 2004b), and Hof and Wirl (2002) specifies
that status arises from an agent’s stock of relative wealth, which can consist of durable
physical capital, financial assets, or both.

In this paper, we assume that social status is generated by relative consumption, as in
the first approach, but specify, as in the second approach, that it depends on a stock vari-
able, here the stock of durable consumption. To our knowledge, this is an extension that has
not been undertaken in the existing literature. Given the importance of durable consump-
tion for countries such as the United States, this seems to us a worthwhile exercise.¹ The
specific form of durable consumption we adopt has been developed by Mansoorian (1998)
in his study of the implications of durability for the dynamics of the current account.²
The present work is also related to the approach used by Carrol, et. al. (1997, 2000) in

¹According to Obstfeld and Rogoff (1996), spending on durables accounted for 18.1% of overall con-
sumption spending in 1994.

²Mansoorian (2000) extends this work by considering the implications of commercial policy. In Mat-
suyama (1990) the stock housing is the durable consumption good.

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