One Standard Will Do Just Fine

Why do economists think of competition as being beneficial to society? For now, think only of the producer side. Firms, locked competition with each other, continuously discover ways to meet consumer needs, only to experience temporary profits and losses before their competitors match them in some dimension. The social benefits:

• Production
• Innovation (technological, product quality, etc)
  
• Greater purchasing power of consumer incomes
• Maximum efficiency gains (consumer and producer surplus is maximized

However, the term "firm" is just a linguistic shortcut used by economists. In reality, a firm is a collective of households, who may or may not know each other but interact through this collective entity that may have a purpose entirely different from their own. You cannot tax a firm. There is no entity like a Microsoft wandering around who can be taxed or punished. You can only do these things to households who are represented collectively as "Microsoft." For this reason, economists place equal weights on consumer or producer surplus and treat them as what they both really are...households.

Those who suggest a role for government in "solving" positional externalities miss this last point. They never seem to suggest that competition among producers is bad, but when some household buys a nicer car than his/her neighbor, thereby inducing their neighbor to try and buy a nicer car it is seen as some kind of social treadmill (as Robert Frank describes it). The households are locked into ever increasing workload without any real gain in relative social status. Therefore, they say, we should regulate the work week hoping to avoid this outcome.

This is a double standard. They will either have to wage a campaign against the concept of a competitive equilibrium maximizing social benefits or abandon the correcting of positional externalities altogether. What is the point of buying some cost saving technology when the competitors will just adopt it also, eliminating those gains? A grocery store that tries to compete customers away from its rival by increasing the number of hours it is open is no different from the neighbor who puts in overtime so that they can put nicer siding on their home. Even if competition eliminates their temporary gains, their production to the rest of the world leaves it a better place.

Revealed Preferences for Relative Status

Naked Self-Promotion:
As promised, here is a new working paper by Susane Daniels and myself. Titled "Revealed Preference for Relative Status: Evidence from the U.S. Housing Market."

This paper investigates the value individuals place on their relative status in consumption, as opposed to absolute status. Using housing data from five Ohio MSAs, we employ a spatial Durbin hedonic price model to estimate willingness to pay for both relative and absolute status. Using this revealed-preference approach, we find individuals, on average, are willing to pay $7,332 per 100 square feet for an increase in absolute house size, compared with $2,257 for an equivalent increase in relative house size. This strongly suggests that while individuals do desire relative status, they value absolute status significantly more.

Susane Daniels is entering her 4th year of the Econ Ph.D. program here at WVU, and is extremely promising. This is the lead essay of her excellent dissertation on Revealed Preferences for Relative Status. In the other essays, she examines the "relative to who" question, as well as breaking the results down by quintile to tease out the "who cares?"

Who Gentrifies Low-Income Neighborhoods? A Problem for Relative Happiness Literature

New NBER working paper by McKinnish, Walsh, and White. Abstract:

This paper uses confidential Census data, specifically the 1990 and 2000 Census Long Form data, to study the demographic processes underlying the gentrification of low-income urban neighborhoods during the 1990's. In contrast to previous studies, the analysis is conducted at the more refined census-tract level with a narrower definition of gentrification and more closely matched comparison neighborhoods. The analysis is also richly disaggregated by demographic characteristic, uncovering differential patterns by race, education, age and family structure that would not have emerged in the more aggregate analysis in previous studies. The results provide no evidence of displacement of low-income non-white households in gentrifying neighborhoods. The bulk of the increase in average family income in gentrifying neighborhoods is attributed to black high school graduates and white college graduates. The disproportionate retention and income gains of the former and the disproportionate in-migration of the latter are distinguishing characteristics of gentrifying U.S. urban neighborhoods in the 1990's.

This paper will prove problematic for the relative happiness literature (aka positional externalities), where the agents are constantly trying to outperform their neighbors by being in the richest neighborhoods and being the richest of the neighbors (often, it is supposedly signaled with house size, which I will weigh in soon on). If households care so much about relative status, then: 1) Why does gentrification occur? Why would the well-off move to poor neighborhoods? and 2) once the gentrification process begins, why are those who are being gentrified out of their neighborhood so slow to leave?

In short, these problems with that line of literature arise because they usually aren't able to answer "relative to who?" If your answer to #1 is "because they'll be the richest person there", then you must concede that the behavior in #2 contradicts #1. The original residents who were "relatively rich" are not leaving after becoming "relatively poor" to their new neighbors.

If absolute status dominates, there is a simple explanation here: People move to poor neighborhoods because they find great bargains there for housing, and those being gentrified out aren't eager to leave because they are reaping the gains of increased property values because of their new neighbors.