Conspicuous Consumption and Satisfaction

econstor
Make Your Publications Visible.
A Service of
zbw Leibniz-Informationszentrum
Wirtschaft
Leibniz Information Centre
for Economics
Winkelmann, Rainer
Working Paper
Conspicuous consumption and satisfaction
Working Paper, No. 30
Provided in Cooperation with:
Department of Economics, University of Zurich
Suggested Citation: Winkelmann, Rainer (2011) : Conspicuous consumption and satisfaction,
Working Paper, No. 30, University of Zurich, Department of Economics, Zurich,
http://dx.doi.org/10.5167/uzh-51534
This Version is available at:
http://hdl.handle.net/10419/77507
Standard-Nutzungsbedingungen:
Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen
Zwecken und zum Privatgebrauch gespeichert und kopiert werden.
Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle
Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich
machen, vertreiben oder anderweitig nutzen.
Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen
(insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten,
gelten abweichend von diesen Nutzungsbedingungen die in der dort
genannten Lizenz gewährten Nutzungsrechte.
Terms of use:
Documents in EconStor may be saved and copied for your
personal and scholarly purposes.
You are not to copy documents for public or commercial
purposes, to exhibit the documents publicly, to make them
publicly available on the internet, or to distribute or otherwise
use the documents in public.
If the documents have been made available under an Open
Content Licence (especially Creative Commons Licences), you
may exercise further usage rights as specified in the indicated
licence.
www.econstor.eu

Conspicuous Consumption and Satisfaction
Rainer Winkelmann∗
University of Zurich, CESifo and IZA
August 2011
Abstract
Traditional tools of welfare economics identify the envy-related welfare loss from
conspicuous consumption only under very strong assumptions. Measured income and
life satisfaction offers an alternative for estimating such consumption externalities. The
approach is developed in the context of luxury car consumption (Ferraris and Porsches)
in Switzerland. Results from household panel data and fixed effects panel regressions
suggest that the prevalence of luxury cars in the municipality of residence has a negative
impact on own income satisfaction.
JEL Classification: D12, D62, I31
Keywords: Ferrari, Porsche, status, consumption externality, Swiss Household Panel
∗Address for correspondence: University of Zurich, Department of Economics, Zuerichbergstr. 14, CH-
8032 Zurich, Switzerland, email: [e-mail]. I thank Holger Bonin, Andrew Oswald,
Kevin Staub, two anonymous referees and seminar participants in Bayreuth, Bamberg, Glasgow (Annual
Meetings of the European Economic Association 2010, Fraser of Allander Institute, 2011) and Lausanne
(Workshop in Redistribution and Well-Being) for helpful comments, Oliver Lipps for support in obtaining
the data, and Wishiro Keo for excellent research assistance.

1 Introduction
There is ample evidence that individual well-being is affected by comparisons with others.
Status concerns are an important feature of our social existence. Higher ranked individuals
are on average healthier (Wilkinson, 2000, Marmot, 2003) and live longer (Oswald and
Rablen, 2008) than lower ranked ones. They also report higher levels of happiness in survey
questions (Di Tella at al., 2007). Relatedly, actions of others provide a “frame of reference”
for own decisions (Frank, 1991). As Karl Marx (1847) famously noted, “A house may be
large or small; as long as the neighboring houses are likewise small, it satisfies all social
requirement for a residence. But let there arise next to the little house a palace, and the
little house shrinks to a hut.”
For the economist, such positional concerns and frame of reference effects are important,
as they can lead to inefficient market outcomes. For example, resources spent on improving
one’s status are wasteful from a societal point of view, as one person’s gain is another person’s
loss. As Layard (1980) puts it “For, though individuals are willing to make sacrifices to
improve their individual position, the net result of status-motivated action will be no increase
in status satisfaction but an increase in sacrifice.” (p. 738). Perhaps the best studied example
of such wasteful competition occurs in the presence of relative consumption effects, i.e. if an
individual’s utility depends not only on the level of her own consumption but also on how
that level compares with the consumption of others.
One cause of such interdependence has been explored by Veblen (1899) who, referring to
the behavior of the nouveau riche during the Second Industrial Revolution in Britain, coined
the term of “conspicuous consumption”. He argued that this consumption “is evidence of
wealth, and thus becomes honorific, and . . . failure to consume a mark of demerit.” Veblen
thus singles out consumption that is intently used as a signal for status. More broadly,
1

conspicuous consumption refers to any consumption activity that is, first, literally “visible”
to outsiders, and, second, positional, in the sense that own consumption utility depends
partly on relative rather than absolute consumption.
Despite the obvious interest for microeconomic theory (e.g. Layard, 1980, Dupor and
Liu, 2003, Arrow and Dasgupta, 2009), and the widespread reference to the concept in
the economic literature, there is surprisingly little direct empirical evidence on the effect of
conspicuous consumption on well-being of others. The objective of this paper is to contribute
such evidence within the context of the life satisfaction literature, in order to provide direct
empirical quantifications of the presence and size of consumption externalities. I propose to
use information on what people say when asked whether they have a good and worthwhile
life, i.e., survey information on “subjective well-being”, “satisfaction”, or “happiness”, in
order to estimate the effect of conspicuous consumption on others’ satisfaction, and thus the
utility loss due to such consumption. The empirical approach using satisfaction equations
is in the spirit of previous papers concerned with the valuation of intangibles, including van
Praag and Baarsma (2005) on the cost of airport noise, Luechinger (2009) for air quality and
Frey et al. (2009) for terrorism.
This paper focuses on a specific instance of conspicuous consumption, the purchase and
display of luxury sports cars in Switzerland. Two brands are considered, Ferrari and Porsche.
These are the two main automobile producers present in the Swiss market that specialize
in the upper segment of luxury sport cars. The demand for these cars has increased over
the recent decade. Whereas total sales of new cars declined between 2001 and 2007, new
registrations of Ferraris and Porsches increased by almost 80% (in 2008, the numbers went
down, see Figure 1). The consequence was a doubling in market share of such luxury sports
2

cars among all newly registered cars from 0.4% in 2001 to 0.8% in 2007.
− − − − −− Figure 1 about here − − − − − − −
The empirical approach in this paper combines information from various sources. Indi-
vidual level satisfaction (with income and with life in general) and other socio-demographic
characteristics (most importantly current household income) are obtained from the 2002 and
2007 waves of the Swiss Household Panel. In a second step, regional information is matched
to each person-year observation. The first, obtained from the Federal Roads Office, provides
the number of new luxury car registrations (Ferrari and Porsche per 1000 population and
year) in the municipality and canton of residence.1 The second, obtained from the Federal
Tax Administration, includes information on average incomes and income inequality, again
for each municipality, canton and year.
The statistical hypothesis being tested is that income and life satisfaction are not related
to the local or regional density of new luxury sport cars, ceteris paribus, against the alter-
native that there is a negative association. The empirical analysis employs linear regression
models with fixed individual specific as well as region specific effects.
2 Background
2.1 Modeling conspicuous car consumption
The following model, an adaptation of Dupor and Liu (2003), provides a useful framework
for thinking about conspicuous car consumption. Let c denote own consumption of car
attributes (such as horsepower, or looks) and ̄c the average attributes in the population of
1A municipality is the smallest administrative and political unit in Switzerland. Depending on size, it
can be a village, town or city.
3

cars. The utility function of identical consumers can be written as
U (c, ̄c, x) (1)
where x is a non-conspicuous composite good. Suppose that people enjoy horsepower
(∂U/∂c = U1 > 0) as well as non-conspicuous consumption (∂U/∂x = U3 > 0), that
marginal utility is diminishing (∂2U/∂c2 < 0, ∂2U/∂x2 < 0), and that horsepower consump-
tion is conspicuous and generates envy (∂U/∂ ̄c = U2 < 0). People then choose c and x in
order to maximize utility subject to the budget constraint
c + px ≤ yf
where yf is income at full employment and leisure is part of x. Substituting the constraint
into utility function (1), individuals thus maximize
U (c, ̄c, g(c))
where g(c) = (yf − c)/p. They take public consumption ̄c as given and trade off the marginal
utility from own conspicuous consumption with the marginal utility from non-conspicuous
consumption. The first-order condition for a maximum is
U1(c, ̄c, g(c)) + g′(c)U3(c, ̄c, g(c)) = 0 (2)
or
1
p = U1(c, ̄c, g(c))
U3(c, ̄c, g(c)) (3)
It is a-priori undetermined whether public consumption ̄c affects the solution to (3), and
hence what the optimal own consumption levels for c and x are. For example, the marginal
rate of substitution between conspicuous and non-conspicuous consumption is independent of
̄c if the utility function is either additively separable, or multiplicative (e.g. of Cobb-Douglas
4