Status Concerns and Occupational Choice Under Uncertainty

Abstract

This paper examines the consequences of status preferences on entrepreneurial risk-taking in a general equilibrium model of occupational choice. We distinguish between two frames of reference. In the first, status is derived from class-membership, the economic indicator of which is the expected relative income of the person's occupation. In the second, status is tied to individual income relative to the mean. We find that the effect of status needs depends on whether or not the status variable itself is subject to risk. While social status increases entrepreneurial risk-taking in the first case, the effect is ambiguous in the second and crucially depends on how status preferences alter the effective degree of risk aversion. The results carry over to the distributional consequences, where status preferences have an equalizing effect only if certain conditions are met. . I want to thank Maik Heinemann, Thomas Riechmann and seminar participants at the 2003 EEA meeting in Venice, Italy, for comments on earlier drafts of this paper. I would also like to thank three anonymous referees for their helpful suggestions. Brought to you by | Purdue University Libraries Authenticated Download Date | 5/28/15 7:56 PM 1 Among others, Robert Frank (1985a;1985b) has contributed to the revival of status considerations in economic theory. There is a still growing body of literature focusing on the implications of status preferences; see e.g. Cole et al. (1998) or Corneo and Jeanne (1998) and the surveys by

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