The two sides of envy

Abstract

The two sides of envy, destructive and constructive, give rise to qualitatively different equilibria, depending on the economic, institutional, and cultural environment. If investment opportunities are scarce, inequality is high, property rights are not secure, and social comparisons are strong, society is likely to be in the “fear equilibrium,” in which better endowed agents underinvest in order to avoid destructive envy of the relatively poor. Otherwise, the standard “keeping up with the Joneses” competition arises, and envy is satisfied through suboptimally high efforts. Economic growth expands the production possibilities frontier and triggers an endogenous transition from one equilibrium to the other causing a qualitative shift in the relationship between envy and economic performance: envy-avoidance behavior with its adverse effect on investment paves the way to creative emulation. From a welfare perspective, better institutions and wealth redistribution that move the society away from the low-output fear equilibrium need not be Pareto improving in the short run, as they unleash the negative consumption externality. In the long run, such policies contribute to an increase in social welfare due to enhanced productivity growth.