Keeping Up with “The Joneses”: Reference-Dependent Choice with Social Comparisons

Abstract

Keeping up with “The Joneses” matters. This paper examines a model of reference-dependent choice where reference points are determined by social comparisons. An increase in the strength of social comparisons, even by only a few agents, increases consumption and decreases welfare for everyone. Strikingly, a higher marginal cost of consumption can increase welfare. In a labor market, social comparisons with coworkers create a big fish in a small pond effect, inducing incomplete labor market sorting. Further, it is the skilled workers with the weakest social networks who are induced to give up income to become the big fish. (JEL D85, J22, J24, J61)