Envy, leisure, and restrictions on working hours

We present a simple model of capital accumulation where agents care about their consumption relative to the consumption of other members of society, ‘envy,’ In this context we quantify the extent of the distortions and welfare costs associated with envy. Under conservative estimates of envy we find that the implied welfare losses are substantial. We explore the implications of alternative policy arrangements designed to minimize the effects of the consumption externality. Our results suggest that if the optimal tax policy is not politically feasible, restrictions on working hours provide an alternative tool to induce a market outcome that resembles the efficient allocation achieved under a benevolent central planner. JEL classification: D62, H21