Russel Sage Foundation

Although non-market goods are not directly allocated through markets, some of these goods are allocated through markets in an indirect fashion. Such is the case with conspicuous consumption: people buy market goods (e.g., clothing) to signal their wealth and then increase the probability of obtaining some non-market goods (e.g., admiration). Perez-Truglia is the first to exploit that relationship to measure the market value of those non-market goods by using a revealed-preference approach. He estimates a signaling model using nationally representative data on consumption in the US. He then uses this model to obtain welfare implications and perform a counterfactual analysis. His estimates suggest that for each dollar spent on clothing and cars, the average household obtains approximately 35 cents in net benefits from non-market goods. The signaling mechanism seems to be a relatively efficient allocation mechanism because it attains almost 90% of the full potential benefits from non-market goods. The unattained benefits give an upper bound to the potential gains from economic policy (e.g., a tax on observable goods). The counterfactual analysis suggests that the proportional tax rate on observable goods that would correct the positional externality is in the order of 40%. Additionally, Perez-Truglia calculates the unique non-linear tax schedule that would fully correct the externality. Finally, he shows that accounting for the consumption of these non-market goods increases the Gini index of consumption inequality by almost 4%.