Positional Preferences: Efficiency and Distortions Under Welfarist- and Paternalistic Governments

Abstract

This paper analyzes the distortionary effects of positional preferences when labor supply is exogenous under both a welfarist and a paternalistic government. Extending the prior literature, reference levels may be partially exogenous to the government (e.g., determined by consumption choices in a foreign country), and individuals may be positional with respect to wealth in addition to consumption. Neither consumption- nor consumption-cum-wealth positionality needs to cause inter-temporal distortions under either welfare criterion. We derive necessary and sufficient conditions for non-distortion of positional preferences. If those conditions are not satisfied, the same reference levels of consumption and wealth can give rise to under-saving or to over-saving -- depending on the extend to which the reference levels are exogenous to the government. Moreover, we provide conditions for which positional preferences for wealth and consumption imply over-consumption with respect to the welfarist criterion but, at the same time, over-saving with respect to the paternalistic criterion.