Boosting Taxes for Boasting About Houses? Status Concerns in the Housing Market

cege Discussion Papers Number 344, March 2018

38 Pages Posted: 27 Mar 2018

See all articles by Johannes Schünemann

Johannes Schünemann

University of Goettingen (Göttingen) - Faculty of Economic Sciences

Timo Trimborn

University of Goettingen (Göttingen)

Date Written: March 22, 2018

Abstract

There is empirical evidence that households use residential houses as status goods. In particular, people are shown to compare their houses with those at the top of the distribution. In this paper, we introduce a residential housing sector and status concerns for housing into a neoclassical model with heterogeneous agents. We find that status concerns exert a negative externality and calculate a progressive Pigovian tax schedule that corrects for the externality, implying a housing tax for rich households of 4.6%. Implementing the tax schedule is associated with a sizable welfare gain. We also find that when the utilitarian social planner is constrained to housing taxes, Pigovian taxation is not constrained efficient. Further increasing the tax for rich households to 7.9% would maximize welfare in the constrained optimum.

Keywords: Status Concerns; Residential Housing; Pigovian Tax, Constrained Efficiency

JEL Classification: E03; O10; D10; H21; R31

Suggested Citation

Schünemann, Johannes and Trimborn, Timo, Boosting Taxes for Boasting About Houses? Status Concerns in the Housing Market (March 22, 2018). cege Discussion Papers Number 344, March 2018, Available at SSRN: https://ssrn.com/abstract=3147031 or http://dx.doi.org/10.2139/ssrn.3147031

Johannes Schünemann (Contact Author)

University of Goettingen (Göttingen) - Faculty of Economic Sciences ( email )

Platz der Goettinger Sieben 3
Goettingen, 37073
Germany

Timo Trimborn

University of Goettingen (Göttingen) ( email )

Platz der Gottinger Sieben 3
Gottingen, D-37073
Germany

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