Positional Goods

Ezra Klein quotes a survey which he thinks shows that the average person cares more about inequality than about his own absolute income:

Robert Frank explains this well in his book Falling Behind: How Rising Inequality Harms the Middle Class, but a nice way to think about it is through housing: Would you rather live in a land where you had a 4,000-square-foot house and everyone else had a 6,000-square-foot house, or one in which you had a 3,000-square-foot house and everyone else had a 2,000-square-foot house? Given this choice, studies show that most respondents pick the latter. They'd rather have less home in absolute terms if it means more home in relative terms. That makes housing a positional good.

All well and good, but the conclusions Klein tries to draw from this are dead wrong. The essence of the question is: Would you rather have the biggest house around, or the smallest? Of course most people would rather have the biggest. The value of the status boost you get from having the biggest house in town rather than the smallest trumps the value you get from having an extra thousand square feet of space.

To reach the conclusion Klein wants us to reach, we need to ask a different question altogether: "Would you rather live in a land where everyone including you has a 4,000sf house except for one person who has a 40,000sf house, or a land where everyone including you has a 3,000sf house except for one person who has a 9,000sf house?"

People will accept a reduction in absolute wealth if it means that they get to be the big fish in the little pond. But if they know they're going to be average no matter what, they don't care so much about whether the biggest house is three times bigger than theirs or ten times.

The thing about positional goods is that they're...well...positional. It's not the factor difference that matters for status purposes; it's the ordinal position. If I'm at the 90th percentile of the income distribution, I don't care whether the guy at the 99.9th percentile makes 10x as much as me or 100x; my ordinal position is exactly the same either way.

And if you understand what it really means for a good to be positional, it becomes clear that there's not a whole lot you can do to mitigate inequality. Half the people will always be below average. No matter how you tinker with the distribution, you can never cram more than ten percent of the population into the top decile. Try as you might, Lake Wobegone will remain forever out of reach.

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As it happens, a discussion

As it happens, a discussion in the comments at my blog ventured into relevant territory not too long ago.

Since it might not be so

Since it might not be so easy to find the Daniels/Ross paper from there, it can be found here.

Ordinal or Cardinal

The thing about positional goods is that they're...well...positional. It's not the factor difference that matters for status purposes; it's the ordinal position. If I'm at the 90th percentile of the income distribution, I don't care whether the guy at the 99.9th percentile makes 10x as much as me or 100x; my ordinal position is exactly the same either way.

I'm not sure that's right. The word 'positional' implies that it's ordinal ranking that matters and the economic literature treats it that way, but if we're talking about a real world phenomenon we can't be so confident. The experiments only show that people care about ordinal position, but these results are also consistent with magnitude being an issue. I'm not aware of any experiments which try to test this.

I think the real problem with the positional externalities idea is that the experiments are not ecologically valid: the experimental conditions don't sufficiently represent real-world conditions as to be able to draw useful conclusions. There's a big difference between having the relative size of your house explicitly brought to your attention and any comparison you actually make in your everyday life. If you're not thinking about relative house-size, it presumably won't produce any welfare loss.

Along the same lines, people will presumably judge their position relative to those they spend around. Since neighbourhoods self-select by income, the overall average house size won't matter as much as local (i.e. those with approximately your own income) average house size.

The experiments only show

The experiments only show that people care about ordinal position, but these results are also consistent with magnitude being an issue. I'm not aware of any experiments which try to test this.

Fair enough. But introspectively, I know that I don't care nearly as much about relative magnitudes as I do about absolute magnitudes and my ordinal position. And I doubt I'm alone in that.

Also, your comment about locality is dead on. Sure, Bill Gates has a much nicer house than I do. But he's so far removed from me socially that it doesn't even register. The relevant comparisons are with my neighbors and others in my social circle. Which includes roughly zero people making more than $500,000 per year.

Crude oversimplification

Maybe it's just the way it was expressed, and what it meant is something more reasonable than what is stated. But this statement:

the average person cares more about inequality than about his own absolute income

as stated is almost certainly false, even if the following more reasonable statement is true:

rank is valued but whether a given change in rank is valued more than a given change in absolute income depends on various factors such as the starting rank, the ending rank, the starting income, and the ending income.

This is a knee-jerk, automatic reasonable-ization that anyone should immediately hit upon when reading something as crude as "cares more about inequality than about absolute income," and since it is so automatic, then maybe that is what is really meant. So what it really meant is not that the average person cares more about inequality than about absolute income, but that in certain situations a person will exchange a particular loss in income in exchange for a particular rise in rank. But also, in certain other situations, the other way around.

When someone says that:

That makes housing a positional good.

Pretty much any reader should, I think, automatically think, "position is a factor in the value of housing," so that an appropriately constructed experiment can bring out that factor (e.g. make the rise in rank large enough and the drop in floorspace small enough so that many would exchange the floorspace for the change in rank), and since any reader should read it that way, maybe that's what is meant. But it's just not stated that way so I'm just not sure if that's what's meant.

This is basic to economic thinking. Whereas people sometimes crudely say, "I like oranges more than apples", this means roughly, "if given a choice I would prefer an orange to an apple", and this is trivially false as an absolute statement. All economists know that the choice changes depending on factors such as how many oranges and apples one has eaten recently.

Also, your comment about

Also, your comment about locality is dead on. Sure, Bill Gates has a much nicer house than I do. But he's so far removed from me socially that it doesn't even register. The relevant comparisons are with my neighbors and others in my social circle.

This is essentially what Wilkinson has been talking about with his "multiplicity of status dimensions." I think only uncouth boors are primarily concerned with being richer than their peers. But even as far wealth competition is concerned, the degree to which inequality of this sort bugs people, ideology and culture can shape it to be relatively envy-free. What was that recent study about conservatives rationalizing away income disparity, even adjusting for income (I think)?

And while there are

And while there are Americans moving to Mexico where they can be the richest person in the village they are greatly outnumbered by Mexicans moving to the US where their homes will be better than back home but still a very long way indeed short of Beverly Hills.

Yep, best empirical reason

Yep, best empirical reason to think positional concerns are outweighed by absolute income.

Power, not assets

Once a person has reached equality with his neighbors, then which becomes more important, raising the standard of the neighborhood with respect to other neighborhoods or raising one's self with respect to one's own neighborhood?
This is a political question, yes? "All for one and one for all" or "Screw you, I am better and more deserving than the rest of you."

Missing the point

And if you understand what it really means for a good to be positional, it becomes clear that there's not a whole lot you can do to mitigate inequality. Half the people will always be below average. No matter how you tinker with the distribution, you can never cram more than ten percent of the population into the top decile.

A vacuous tautology. Of course 10% = 10% and the bottom 50% have less income than the 50%. I suppose since 1 is not equal to 2 (and in fact will never be!) we should throw up our hands at solving any of society's ills.

It's not who is in the top decile but how much overall wealth they have. It's a very different world where the top 10 percent has 30-40% of the wealth instead of 70-80% of the wealth.

Another example:

Distribution of income: Top 10% makes $1,000,000 annually/bottom 10% makes $5,000 annually.

Distribution of income: Top 10% makes $120,000 annually; bottom 10% makes $45,000 annually.

Very different worlds socially.

Furthermore if you'd dug a little further you would know that there are ways to mitigate/moderate the affects of positional competition. One such way that exists in past and current cultures are"gift economies" wherein status is given to the greatest gift givers. A more modern strategy is the "Vanity Tax" (such as the tax on plastic surgery enacted in 2004 in New Jersey) and can be used to mitigate the effects of positional purchases through redistribution to lower percentiles.

Another example would be a tax on remodeling houses in the top 10% of assessments. Example, suppose someone who has a 5-million dollar home. Assess a 50% vanity tax on further additions/improvements. If said person then wishes to improve their standing by paying $2 million on improvements they will improve their relative standing the same as if they were untaxed ($6 million asset house instead of a tax-free $7 million asset house). The tax could then go to low-income housing, first home assistance programs, etc.

See also http://www.youtube.com/watch?v=QalNVxeIKEE, http://www.concurringopinions.com/archives/2007/06/vanity_tax_vs_w.html.

The Point

The point is: can you achieve the distribution you desire for everyone else's incomes voluntarily, or do you have to use force to redistribute wealth from higher income earners to lower income earners?

I prefer to live in societies that are not founded on violence and authority.

"The essence of the question

"The essence of the question is: Would you rather have the biggest house around, or the smallest? Of course most people would rather have the biggest. The value of the status boost you get from having the biggest house in town rather than the smallest trumps the value you get from having an extra thousand square feet of space."

Isn't that the truth. So many people, in most cultures, want the biggest and the best.