Working Papers in Economics,
University of Gothenburg, Department of Economics

Abstract: Much evidence suggests that people are concerned with their relative consumption, i.e., their own consumption relative to that of others. Yet, conspicuous consumption and the corresponding social costs have so far been ignored in savings-based indicators of sustainable development. The present paper examines the implications of relative consumption concerns for measures of sustainable development by deriving analogues to genuine saving when people are concerned with their relative consumption. Unless the positional externalities have been fully internalized, an indicator of such externalities must be added to genuine saving to arrive at the proper measure of intertemporal welfare change. A numerical example based on U.S. and Swedish data suggests that conventional measures of genuine saving (which do not reflect conspicuous consumption) are likely to largely overestimate this welfare change. We also show how relative consumption concerns affect the way public investment ought to be reflected in genuine saving.

Keywords: Welfare change; investment; saving; relative consumption

JEL-codes: D03; D60; D62; E21; H21; I31; Q56

45 pages, January 2016

Note: This is an updated and modified version of a working paper from (2014) with the same title (No 605).

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