Does Context Matter More for Some Goods than Others?

Abstract

Context is known to affect evaluation for many goods. For example, a house of any given size is more likely to be viewed as adequate the larger it is relative to other houses in the same locale. If evaluations of some goods are more sensitive to context than others, there is no presumption that privately optimal consumption patterns will be socially optimal. Rather, consumers will spend too much on goods whose evaluations depend most strongly on context and too little on those whose evaluations depend least strongly on context. For instance, if evaluations of houses are more sensitive to context than evaluations of leisure, then people will spend too much money on houses and too little time with family and friends. But if context sensitivity is the same for all goods, no distortions result.

This paper suggests theoretical grounds for expecting context sensitivity to differ across goods. Evaluations should be more sensitive to context for goods whose consumption is more readily observed by others and also for goods for which relative consumption is linked to other important payoffs. The quality of school that a child attends, for example, is often strongly linked to its parents’ relative expenditures on housing.

A survey of empirical evidence suggests that observed differences in context sensitivity track the differences predicted on theoretical grounds.

Citation

Frank, R.H. (2007), "Does Context Matter More for Some Goods than Others?", Bianchi, M. (Ed.) The Evolution of Consumption: Theories and Practices (Advances in Austrian Economics, Vol. 10), Emerald Group Publishing Limited, Leeds, pp. 231-248. https://doi.org/10.1016/S1529-2134(07)10010-7