PhD Seminar: Taxation of Status Goods: Balancing Efficiency and Rawlsian Fairness

Taxation of Status Goods: Balancing Efficiency and Rawlsian Fairness

Abstract: This paper presents a stylized model of pure status goods with matching concerns, fixed costs for brand development and asymmetric information that leads to endogenous stratification in each one of two populations. The two populations share the same ability dispersion, which may vary across economies. A benevolent social planner adopts a mixed utilitarian–maximin social welfare criterion. The social optimum has equally sized strata, and the optimal number of brands depends on ability dispersion, brand-development costs, the signaling population’s share of match output, and the planner’s concern for inequality. A stronger concern for inequality increases the optimal degree of stratification when the signaling population’s share of match output is sufficiently large, but decreases it otherwise.  We characterize equilibrium under contestable competition and monopoly, and calculate the optimal taxation in each case.  In a contestable market, laissez-faire competition generates uneven strata, but a suitable progressive tax implements the social optimum. Under monopoly, a well-deliberated flat tax or subsidy implements the optimal allocation. However, the extra welfare generated by status goods is distributed differently. In a contestable market, it accrues to the matching populations, whereas under monopoly, it is captured by the monopolist.