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Social Inefficiency of Free Entry with Status Effects


  • I want to thank the referee, the associate editor, and the editor for their helpful comments or suggestions. The remaining errors are mine.

Wai Chiu Woo, Department of Economics, 10/F, Esther Lee Building, Chung Chi Campus, the Chinese University of Hong Kong, Sha Tin, Hong Kong (


Free markets may support too many or too few firms. Traditional analysis does not provide unambiguous conclusion in this respect. This paper introduces status effects of consumption into the model. It shows that a sufficiently significant status effect tends to support too many firms. Two conditions are required for this result. First, complementary effect between status and consumption is not significant. Second, a higher average status consumption level makes everyone more difficult to get the same degree of gain in status. Both conditions appear to be realistic.