Scandinavian Working Papers in Economics

Umeå Economic Studies,
Umeå University, Department of Economics

No 900: Genuine Saving and Conspicuous Consumption

Thomas Aronsson () and Olof Johansson-Stenman ()
Additional contact information
Thomas Aronsson: Department of Economics, Umeå School of Business and Economics, Postal: Umeå University, S 901 87 Umeå, Sweden
Olof Johansson-Stenman: Department of Economics, School of Business, Economics and Law, Postal: University of Gothenburg, SE – 405 30 Gothenburg, Sweden

Abstract: Much evidence suggests that people are concerned with their relative consumption, i.e., their consumption in relation to the consumption of others. Yet, the social costs of conspicuous consumption have so far played little (or no) role in savings-based indicators of sustainable development. The present paper examines the implications of such behavior for measures of sustainable development by deriving analogues to genuine saving when people are concerned with their relative consumption. Unless the resource allocation is a social optimum, an indicator of positional 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

39 pages, November 20, 2014

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