On Habit and the Socially Efficient Level of Consumption and Work Effort

We study relative preferences in a general equilibrium model where households make social comparisons and/or get habituated to levels of labour-effort they supply and goods they consume. Bayesian estimations for the US support the existence of a society based on such preferences. In particular, there is evidence that households a) make social comparisons and form habituation patterns in consumption and b) face peer-pressure when supplying labour and are aversely affected by it. Using our empirical estimates we provide numerical results for the optimal tax levels that correct for inefficiencies generated by relative preferences and distortions in product and labour markets. Owing to the latter, we find weak support for `corrective' taxation as a way of mitigating the inefficiencies generated by such preferences.