Do positional preferences for wealth and consumption cause inter-temporal distortions?

Abstract

This paper derives necessary and sufficient conditions under which positional preferences do not induce inter-temporal distortions. When labor supply is exogenous, positional preferences for consumption have been shown to be non- distortionary for a class of models. However, it has not been explored whether the same holds when households also exhibit positional preferences for wealth. The anal- ysis identifies a restricted homogeneity-property which, when not satisfied, induces positional preferences to be distortionary, despite inelastic labor supply. Without positional preferences for wealth, a constant marginal rate of substitution-property is necessary and sufficient for a consumption positionality to be non-distortionary. Once a household also has positional preferences for wealth in addition, the con- sumption positionality almost always becomes distortionary, as the implied effects of the positional concerns induce opposing effects on a household's saving behavior. Under a constant marginal rates of substitution-property, these opposing effects exactly offset each other.