Methods of Comparison in Games of Status

This paper considers the effects of changes in the income distribution in an economy where agents’ utility depends both on consumption and on their rank in the distribution of consumption of a positional good. We introduce a new methodology to compare the behavior of agents that occupy the same rank in the two different income distributions but typically have different levels of incomes, and analyze equilibrium choices and welfare of every member of the society for continuous distributions with arbitrary, even disjoint, ranges. If an income transformation raises incomes at the lower end of the income distribution, the poor will typically be better off. But because such an income transformation also increases the degree of social competition, the middle class will typically be worse off - even if they have higher incomes as well. An increase in incomes can make all better off, but only if it is accompanied by an increase in income dispersion. Our new techniques highlight the importance of density of social space as we demonstrate that one can have an increase both in income and relative position but still be worse off.