Umeå Economic Studies,
Umeå University, Department of Economics

Abstract: This article concerns commodity taxation and income redistribution when agents derive status from living up to a consumption norm that gives rise to positional preferences. The consumption norm relates an individual agent´s visible expenditure on a given prestige good to the visible expenditure on the same prestige good made by a reference group (high-income agents). The novelty in this paper is to treat the agents´ personal belief in the consumption norm as endogenous. In line with Cognitive Dissonance Theory it is assumed that if an agent lives up to (does not live up to) a given norm, then the agent´s belief in the norm increases (decreases) over time. This behavior can be used by a policy-maker to change the belief in a norm that the policy-maker perceives as distortionary. As such, the approach in this paper points to an alternative method of correcting for consumption externalities (or for imperfect consumption behavior) and we characterize how this policy incentive affects commodity taxation and income redistribution.

Keywords: consumption norms; efficiency; externalities; optimal taxation

JEL-codes: D62; H21; H23

46 pages, August 31, 2016

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