Veblen effects and broken windows in an environmental OLG model

TL;DR

This paper develops an environmental Overlapping Generations model incorporating Veblen effects and social comparison dynamics, revealing that status-driven overconsumption harms the environment and leads to fragile green preferences and oscillations.

Contribution

It introduces a novel OLG model with asynchronous preference updates influenced by social comparisons and Veblen effects, analyzing their impact on environmental sustainability.

Findings

Overconsumption driven by Veblen effects damages the environment.

Taxing consumption does not mitigate social comparison-driven overuse.

Strong Veblen effects cause persistent oscillations and low environmental quality.

Abstract

Can constantly comparing ourselves to others lead to overconsumption, ultimately increasing the ecological footprint? How do social comparisons shape green preferences over time? To answer these questions, we develop an environmental Overlapping Generations (OLG) model that explicitly accounts for Veblen effects and allows green preferences to be updated asynchronously, influenced by past environmental conditions and relative status considerations. We show that, along the optimal path, positional spending leads to overconsumption, which is detrimental to the environment. Taxing consumption is counterproductive as it does not directly address the social comparisons issue, leaving the problem unchanged. When the Veblenian mechanism is weak, the introduction of a materialistic ``secular trend'' -- that lowers the importance placed on the public good -- gives rise to two stable equilibria separated by a saddle: one in which agents care about environmental quality as much as consuming, and the other in which they derive utility solely from the latter. Studying the basins of attraction reveals that green investments are highly fragile. Our numerical experiments further indicated that, when Veblen effects are strong, the model depicts endogenous, persistent, aperiodic oscillations. In this case, green preferences fluctuate close to zero, and environmental quality is very low. Taken together, these findings suggest environmental vulnerability grows in parallel with status-driven consumption.