How Should We Regulate Costly Signals? the Welfare Implications of Conspicuous Consumption

Abstract

Should we tax luxury goods and other conspicuous consumption? If so, when are taxes or bans most beneficial? We develop a model to assess the welfare implications of costly signaling. We find that the availability of the opportunity to signal can reduce welfare. Welfare losses from the availability to signal are more likely when the benefit of acceptance is high, many receivers would accept a sender at random, or wealth disparity is significant. Bans, in certain settings, and luxury'' taxes, in all settings, can improve welfare. Taxes are most beneficial when populations are wealthy, but bans may be preferred when wealth disparity is significant. Our model is the only model to address welfare from the availability to signal with the following features: senders who follow a wealth distribution are given the opportunity to out-signal'' peers, receivers vary in selectivity, and benefits from rank are allowed to develop endogenously. As we argue, these features are necessary for accurately analyzing welfare.