Indivisible Goods and Relative Wealth Concerns: Gambling, Under-Participation, and Lotteries

45 Pages Posted: 15 Dec 2019 Last revised: 27 Nov 2023

See all articles by Bingcun Dai

Bingcun Dai

University of Oxford, Said Business School, Students

Pavel G. Savor

DePaul University - Kellstadt Graduate School of Business; affiliation not provided to SSRN

Mungo Ivor Wilson

University of Oxford - Said Business School

Date Written: November 21, 2023

Abstract

We study an endowment economy with heterogeneous agents and two complementary consumption goods, one of which is indivisible. Although agents have standard log-CES preferences, the indivisibility gives rise to Friedman-Savage convexity in indirect utility. Agents care about relative, not just absolute, wealth, as well as rankings. While agents dislike small risks, they like large ones. Poorer agents exhibit a preference for lottery-like assets with negative expected returns and also invest a smaller share of wealth than richer agents in assets with positive expected returns. If the difference in wealth is large, poor agents play a lottery among themselves with a single winner. In consequence, richer agents have a higher expected return on wealth and inequality is expected to increase. While initial inequality affects investment choices, it has only a minor effect on ultimate inequality. Therefore, standard prescriptions for reducing inequality may have little effect.

Keywords: Indivisible goods, Friedman-Savage, lotteries, skewness, non-participation

JEL Classification: G12

Suggested Citation

Dai, Bingcun and Savor, Pavel G. and Wilson, Mungo Ivor, Indivisible Goods and Relative Wealth Concerns: Gambling, Under-Participation, and Lotteries (November 21, 2023). Available at SSRN: https://ssrn.com/abstract=3494006 or http://dx.doi.org/10.2139/ssrn.3494006

Bingcun Dai

University of Oxford, Said Business School, Students ( email )

Oxford, OX1 5NY
United Kingdom

Pavel G. Savor (Contact Author)

DePaul University - Kellstadt Graduate School of Business ( email )

1 E. Jackson Blvd.
Chicago, IL
United States

affiliation not provided to SSRN

Mungo Ivor Wilson

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain
+44 (0) 1865 288914 (Phone)

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
92
Abstract Views
673
Rank
506,051
PlumX Metrics