R Becker 1974 JPE Theory of Social Interactions

A Theory of Social Interactions
Author(s): Gary S. Becker

Source: The Journal of Political Economy, Vol. 82, No. 6 (Nov. - Dec., 1974), pp. 1063-1093
Published by: The University of Chicago Press
Stable URL: http://www.jstor.org/stable/1830662
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A Theoryof Social Interactions
GaryS. Becker
Research
ofChicagoand NationalBureauofEconomic
University
This essayuses simpletoolsof economictheoryto analyze interactions

betweenthe behaviorof some personsand different characteristics
of
other persons. Although these interactionsare emphasized in the
contemporarysociological and anthropologicalliterature,and were
considered the cornerstoneof behavior by several prominentnine-
teenth-century economists,theyhave beenlargelyignoredin themodern
economic literature.The central concept of the analysis is "social
income," the sum of a person's own income (his earnings,etc.) and
the monetaryvalue to him of the relevantcharacteristicsof others,
which I call his social environment.By using the concept of social
income,I can analyze the effecton these expendituresof changes in
differentsourcesofincomeand in differentprices,includingthe "price"
ofthesocial environment. Interactionsamongmembersofthesame fam-
ily receive the greatestattention.The "head" of a familyis defined
not by sex or age, but as that member,if thereis one, who transfers
generalpurchasingpowerto all othermembersbecause he cares about
theirwelfare.A familywith a head is a highlyinterdependent organi-
zation that has the followingproperties:A redistribution of income
among membersdoes not affectthe consumptionor welfareof any
memberbecause it simplyinduces offsetting changesin transfersfrom
the head. Not only the head but othermemberstoo act "as if" they
"loved" all members,even whentheyare reallyselfish, in thesensethat
theymaximizenottheirown incomealone but familyincome.Transfers
fromparentsto childrenin the form,say, of schooling,gifts,and be-
quests tend to be negativelyrelated to what the income of children
would be relativeto theirparentsin the absence of these transfers.
Therefore,the relativeincome of childreninclusiveof transferscould
be unrelatedor even negativelyrelated to thesetransfers.Consequent-
ly, one cannot inferanythingabout the stabilityacross generationsof
economicor social positionssimplyfromknowingthe relationbetween
parentalpositionand the amounttransferred.
[Journalof Political Economy,1974, vol. 82, no. 6]

C) 1974 by The University of Chicago. All rights reserved.
i063
Io64 JOURNAL OF POLITICAL ECONOMY
"No Man is an Island." [JOHN DONNE, Devotions upon

Emergent]
"Man is a social animal." [SENECA, De beneficiis]
1. Introduction
Before the theoryof consumer demand began to be formalized by Jevons,

Walras, Marshall, Menger, and others, economists frequently discussed
what they considered to be the basic determinantsof wants. For example,
Bentham (1789, chap. 5) discusses about 15 basic kinds of pleasures and
pains-all other pleasures and pains are presumed to be combinations of
the basic set-and Marshall (1962, bk. 3, chap. 2) briefly discusses a
few basic determinants of wants before moving on to his well-known
presentation of marginal utility theory. What is relevant and important
for present purposes is the prominence given to the interactions among
individuals.
Bentham mentions "the pleasures ... of being on good termswith him
or them," "the pleasures of a good name," "the pleasures resultingfrom
the view of any pleasures supposed to be possessed by the beings who
may be the objects of benevolence," and "the pleasures resultingfromthe
view of any pain supposed to be sufferedby the beings who may become
the objects of malevolence." Nassau Senior said that "the desire for dis-
tinction ... is a feeling which if we consider its universality, and its
constancy, that it affectsall men and at all times, that it comes with us
from the cradle and never leaves us till we go into the grave, may be
pronounced to be the most powerful of all human passions" (quoted by
Marshall 1962, p. 87.) Marshall also stresses the desire for distinction
and illustratesits influence by discussing food, clothing, housing, and pro-
ductive activities.1
Over the years I have received helpful commentson a succession of draftsfrom

numerouspersons,especiallymycolleaguesat theUniversityof Chicago and theNational
Bureau of Economic Research. I received veryusefulcommentson the draftprepared
forpublication fromRobert Barro, Isaac Ehrlich, Sam Peltzman, and George Stigler,
and valuable researchassistancefromWalter Wessels. My researchhas been supported
by a grant to the NBER from the National Instituteof Child Health and Human
Development,National Institutesof Health, U.S. Departmentof HEW; but the paper
is not an officialNBER publication since it has not been reviewedby the NBER Board
of Directors.
1 He limitshis discussionofconsumerdemand to the largelyformaltheoryofmarginal
theorybecause of the importance he attaches to the interactionbetween activities,
consumerbehavior and the basic wants: "Such a discussionof demand as is possibleat
this stage of our work must be confinedto an elementaryanalysis of an almost purely
formalkind" (1962, p. 90). He neverdeveloped the more complicated and less formal
analysis.
SOCIAL INTERACTIONS I o65r
As greaterrigorpermeatedthe theoryof consumerdemand,variables

like distinction,a good name, or benevolencewere pushed furtherand
further out ofsight.Each individualor familygenerallyis assumedto have
a utilityfunctionthatdependsdirectlyon the goods and servicesit con-
sumes.This is not to say thatinteractionsbetweenindividualshave been
completelyignored.Pigou (1903), Fisher (1926, p. 102), and Panteleoni
(1898)2 includedattributes ofothersin utilityfunctions(but did nothing
withthem). In recentliterature,"demonstration"and relativeincome"
effectson savings and consumption,3 "bandwagon" and "snob" influences
on ordinary consumption theory,4 and the economics of philanthropic
contributions5 have been discussed. But these effortshave not been unified
and, more significantly,have not captured the dominance attributed to
social interactions by nineteenth-centuryeconomists.
Of course, sociologists have fora long time emphasized the central role
of interactions and their importance in the basic structure of wants or
personality. Veblen's conspicuous consumption and conspicuous leisure
(if for this purpose he is classified as a sociologist) have entered ordinary
discourse. At one point he said: "But it is only when taken in a sense far
removed from its naive meaning that the consumption of goods can be
said to affordthe incentive fromwhich accumulation invariably proceeds.
The motive that lies at the root of ownership is emulation," and "the
usual basis of self-respectis the respect accorded by one's neighbors"
(Veblen 1934, pp. 25, 30). Interactions were also emphasized by
Durkheim, Simmel, Freud, and Weber, as well as in modern discussions
of "social exchange" and the "theory of action" (see Blau 1968; Parsons
1968).
My interestin interactionscan probably be traced to a study of discrim-
ination and "prejudice" where I analyzed discriminatorybehavior by
incorporating the race, religion, sex, or other personal characteristics of
employees, fellow workers,customers, dealers, neighbors, etc., into utility
functions(Becker 1971 [1st ed., 1957]). Subsequently, in order to provide
a theoretical frameworkfor a study of philanthropy by the National Bu-
reau of Economic Research, I incorporated the standard of living of
"poorer" persons into the utilityfunctionsof "richer" ones (Becker 1961).
Further reflectiongradually convinced me that the emphasis of earlier
economists deserved to be taken much more seriously because social
interactions had significance far transcending the special cases discussed
by myself6and others.
2
I owe thisreferenceto George Stigler.
3 See, e.g., Bradyand Friedman (1947), Duesenbery(1949), or Johnson(1952).
4 See Leibenstein(1950).
5
See Vickery (1962), Schwartz (1970), Alchian and Allen (1967, pp. 135-42), and
Boulding (1973).
6
Other draftsthatwere also circulatedinclude Becker (1968).
This essay incorporates a general treatment of interactions into the

modern theoryof consumer demand. In Section 2, various characteristics
of differentpersons are assumed to affect the utility functions of some
persons, and the behavioral implications are systematically explored.
Section 3 develops furtherimplications and applications in the context of
analyzing intrafamily relations, charitable behavior, merit goods and
multiperson interactions, and envy and hatred. The variety and signifi-
cance of these applications is persuasive testimonynot only to the impor-
tance of social interactions but also the feasibilityof incorporating them
into a rigorous analysis.
2. Theoretical Framework
A. Equilibrium
fora SinglePerson
According to the modern (and very old!) theory of household behavior,7
Ui = Ui(Zl, ..,Zm) (2.1)

is the utilityfunctionof the ith person, and Z,, ..., Zmare the basic wants
or commodities. As indicated earlier, Bentham mentions about 15 basic
wants, whereas Marshall and Senior stressan even smaller number. Each
person also has a set of production functions that determine how much
of these commodities can be produced with the market goods, time, and
other resources available to him:
Zj = f](xj tj Ei, R Rj), (2.2)

where xj are quantities of differentmarket goods and services; tj are
quantities of his own time, E' stands for his education, experience, and
"environmental" variables; and RJ,..., R. are characteristics of other
persons that affecthis output of commodities. For example, ifZ1 measures
i's distinctionin his occupation, R,.. ., R1jcould be the opinions of i held
by other persons in the same occupation. Presumably, characteristics of
others affectthe production of a significantfractionof commodities.
If the Rj were completely outside i's control-that is, unaffectedby what
he does with his resources-i would maximize U taking the Rj as given.
This is one way to justify the usual neglect of interactions. They are
considered beyond the control of the persons being studied and are there-
fore taken as given when one is analyzing their reactions to changes in
resources and prices.
The point of departure of my approach is to assume the contrary,
namely, that i can change Rj by his own efforts.For example, he can
avoid social opprobrium and perhaps ostracism by not engaging in
criminal activities; achieve distinction by working diligently at his occu-
7 For an expositionof this theory,see Michael and Becker (1973).
SOCIAL INTERACTIONS io67
pation, giving to charities, or having a beautiful house; or relieve his

envy and jealousy by talking meanly about or even physically harming
his neighbors. These effectscan be formalized in a production functionfor
the (RJ, ..., RJ) that depends partly on the effortsof i and partly on
other variables.
To simplifythe discussion,8 I follow Senior and assume only a single
commodity (distinction?) that is produced with a single good (the input of
time is ignored) and a single characteristic of others. Then maximizing
utilityis equivalent to maximizing the output of this commodity, and one
can write
Ui = Z(x, R). (2.3)
I assume also (until Section 3C) that the effectofothervariables (including

the effortsof others) on this characteristic is not dependent on i's own
efforts.Therefore, R can be written as the additive function
R = Di + hA (2.4)
where h measures the effectof i's efforts,and Di the level of R when i
makes no effort;that is, Di measures i's "social environment."
His budget constraintfor money income can be writtenas
PxX + PRh = Ii (2.5)

where Ii is his money income, PRhis the amount he spends on R, and PRis
the price to him of a unit of R. Substitute R - Di forh in equation (2.5)
to get
Pax + PRR = Ii + PRDi = Si. (2.6)
The right-hand side gives the sum of i's money income and the value to
him of his social environment, and will be called his social income. The
left-handside shows how his social income is "spent": partly on his "own"
goods (x) and partly on the characteristicsof others (R).'
If i maximizes the utility-output function given by equation (2.3)
subject to the constraint on social income given by equation (2.6), the
equilibrium condition is 10
aui OUi = Px (2.7)

Ax / AR PR
8 I have also developedthe analysisassumingmany commoditiesand many characteris-

tics.
9 Sociologistssometimesassertthat variables like social approval and respect"do not
have any materialvalue on whicha price can be put" (see Blau 1968). But pricesmeasure
onlyscarcityand have nothingintrinsicallyto do with"materialvalue"; PR,forexample,
only measuresthe resourcecost to i of changingsocial approval, respect,etc.
10 I assume forsimplicityin this formulathat PR measuresthe marginal as well as
average price of R.
U0
0 -e-
o D~~~~~~~~~~~~~~~~~
0 D SO SI R
FIG. 1
If I did not want to purchase any R, PR would be a "shadow" price,

measured by the monetary equivalent of the marginal utility(equal to the
marginal product) of R to i when R = Di (or when h = 0).
His equilibrium position is shown in figures 1 and 2. The firstfigure
assumes that R has a positive marginal product in the production of Z (a
positive marginal utility); that R refers, for example, to the respect
accorded i rather than to his envy of others. The quantity OD measures
his social environment,and Oxo his own income (measured in termsof x),
so that the "endowed" point E0 gives his utilitywhen he spends nothing
on R. If E0S0 measures the opportunities available for purchasing addi-
tional R," he would maximize his utilityby moving along E0S0to point
eon where the slope of this opportunity curve equaled the slope of his
" If he can also reduce R by givingup own goods, the curve E,,S. would continuein
the southwestdirection(see ES, in the figure).However, thissectionwould be irrelevant
if R had positivemarginalutility.
SOCIAL INTERACTIONS I o69
x
hlis
U 2. UZ F. U1 U3
indifferencecurve. His equilibrium purchase of R is measured by the

line segment ho.
Figure 2 assumes that R has a negative marginal product (or utility)
because, say, it measures the income or prestige of persons that i envies.
The section of the opportunity curve to the southeast of point E0 is now
irrelevant,
and he movesalong thesouthwestsectionE0Soto pointe0. He
is willing to give up resources to reduce R because his utilityis raised by a
reductionin R; at pointe0, he spendsenoughresourcesto reduceR by how
Note that since the marginal (and average) price of R is negative in
figure2, i's social incomeis less thanhis own incomebecause thevalue of
his social environment is subtracted from his own income. That is, he is
made worse offby his social environmentif it is dominated by character-
istics of others that are distastefulto him. Note too that as long as the
marginal utilityof R is not zero at the socially endowed position, his social
I070 JOURNAL OF POLITICAL ECONOMY
incomewould differ fromhisown incomeevenifhe did notwantto spend

anythingon R. He would add to (or subtractfrom)his own incomethe
productofD and the (monetaryequivalentof the) marginalutilityofR
at the endowedpositionEon In otherwords,the traditionalincomecon-
cept is incompleteeven when no resourcesare spenttryingto influence
the attitudesor situationof others.
The analysisdeveloped forsocial interactionsin thesefiguresand in
equations (2.3), (2.6), and (2.7) is also applicable wheneverthereis a
physicalenvironment that eithercan be altereddirectlyor can have its
effectsaugmentedor diminished.For example, the human capital of a
personis the sum of the amount inheritedand that acquired through
investments; moreover,the amountinvestedis partlydeterminedby the
inheritance. thetemperature
Or in a houseis determinedby the weather
and expenditures on fuels,insulation,etc.,thatreinforce or offsetthenat-
ural environment.
A more general analysis,therefore,would assume that every term
enteringthe utilityfunctionhas both an environmentaland acquired
component.The generalanalysiscould readilybe developed,but I have
chosento simplify the discussionby ignoringthe nonsocialenvironment.
The resultsare consistent withthosefromthe generalanalysisas long as
the contribution of the social environment is, on the whole,significantly
moreimportantthan thatof thephysicalenvironment. Thisis assumedto
be true. (I am indebtedto GilbertGhez and especiallyRobertBarrofor
stressingthegeneralnatureof the analysis.)
B. andPriceEffects
Income
An increasein i's own incomealone-without any changein pricesor the
social environment-wouldincreasebothx and R unlessone wereinferior.
The averagepercentageresponsein x and R per 1 percentchangein his
own incomeis notunity,but is lessby thefractiona, wherea is theshare
ofthesocial environment in hissocial income.12 Therefore,theeffectofa
change in his own income on his utility-output is smaller the more
importanthis social environment is.
Put differently, the greaterthe contribution of his social environment
to his social income,the more his welfareis determinedby the attitudes
and behaviorofothersratherthanby hisownincome.Traditionalmodels
equation (2.6) withrespectto I, alone, i - wxn, + WRfR = 1-a,

12 By differentiating
where
pW x _ PRR - dx I, dR Ii x =PRDI
St St dI1 x d11 R St
and I am assumingthatPR is given (not dependenton h, x, etc.). Of course,the weighted
average of income elasticitieswith respectto a change in Si mustequal unity,as in the
usual analysis.
SOCIAL INTERACTIONS 1071
of choice by economistsassume that own efforts and access to property
income and transferpaymentsdeterminewelfare.On the otherhand,
thosewho stressthe social environment, its normativerequirements and
sanctionsforcomplianceand noncompliance,and the helplessnessof the
individualin the face of his environmentnaturallysee societydomin-
atingindividualefforts and, consequently,see littlescope forimportant
choicesby individuals.
The relativeimportanceof the social environment,as well as other
implicationsof the theoryof social interactions,can be empirically
estimatedfrominformationon expendituresmotivatedby these inter-
actions.If i's social environmentdid not change when his own income
changed, the induced absolute change in the characteristics of others
would equal thechangein his contribution to thesecharacteristics.How-
ever,therelativechangein hiscontribution would differ
fromtherelative
change in these characteristics because the level of the latteris partly
determinedby the social environment.
Consideragain figures1 and 2, wherean increasein i's own income
withno changein the environment is shownby a verticalincreasein the
endowedpositionfromE0 to E1. Since his equilibriumpositionchanges
fromeo to e1,thechangein R is exactlyequal to h1 - ho, thechangein i's
contribution to R. The percentagechange in R in figure1 is clearlyless
thanthatin A,sinceR is thesumofh and (a fixed)D. Since thepercentage
change in R in figure2 is negative,it is also less than the percentage
changein A,whichis positive(sinceh is negative).However,ifR had been
increasedby theincreasein i's own income-if, say, the new equilibrium
positionwas at pointe'-the percentagechange in R would be positive
and would clearly exceed in algebraic value the negative percentage
changein h.
The own-incomeelasticityofdemandforcontributions is relatedto the
ofdemandforcharacteristics
elasticity by thefollowingformula:13
dh I, nR__
_ _
(I~8
=
h -
-2 n( a ) (2.8)
where0 < /3< 1 is thefractionofown incomethatis spenton contribu-

tionsto R. If a > 0, if the social environment
adds to i's social income,
13Since dh/dI = dR/dIi,

dh Ii dR Ii R R
nh = j f * Ii jf= - * R= nR * R. (2.8')
But
RPRR 1 + PRD 1 Si-I 1 + 1/(1 - -1 (1 -) + a/A
h PRh PRh /)Ii 1
Since 1 - a= (see n. 12 above), nh = (nRln)(C/I3 + 1 - a).
then clearly nh > 1R.'4 Moreover if n > i = 1 - a < 1, necessarily

nh > 1 even whennR < 1; thatis, contributions to the characteristicsof
otherscould have a "high" incomeelasticityevenwhenthecharacteristics
themselveshad a "low" elasticity.Of course,if nh > 1, the own-income
elasticityof demand forown consumption(ny)would be less than unity.
That is, social interactionimpliesa relativelylow income elasticityfor
own consumptionevenwithoutintroducing transitorychangesin income,
errorsin variables,and the like.
Equation (2.8) further impliesthatan increasein a, an increasein the
social environment, with no change in the own-incomeelasticityof de-
mand forcharacteristics relativeto the averageelasticity(nR/A), 5 would
increase the own-incomeelasticityof demand for contributions.16 In
otherwords,themorethati's social incomewas determinedby his social
environment, thegreaterwould be thepercentagechangein hiscontribu-
tionsto the characteristics of othersas his own incomechanged.
If, on the otherhand, < 0-the social environment
a subtractedfrom
i's social income-then equation (2.8) impliesthatnh < nR whennR > 0,
and nh > nR whennR < 0 (these different cases are shownin fig.2). His
demand forcharacteristics would probablybe reducedby an increasein
his own income (i.e., nR < 0) if these characteristics have a negative
marginalutilityto him.Again, an increasein a, withnR/i held constant,
would raise nh (the argumentin n. 16 fullyapplies).
Since thesocial environment to any personcannotbe readilyobserved,
an indirectmethodofestimatingat least itssignwould be useful.If nR/l
wereknown,thatis, ifthe relativeincomeelasticityof demand forchar-
acteristicswere known,thesignof x could be estimatedsimplyfrominfor-
mationon theown-incomeelasticityof demand forcontributions to the
environment,and its magnitudefromadditional informationon the
fractionof own income spent on these contributions.Equation (2.8)
impliesthat
-
= h(f/'nR) - 1 (2.9)
1/Al-1
Therefore, a j 0 as nh( l/nR) j 1, and information on nh, n/nR, and /3

would be sufficientto estimatea.
An increasein a socialenvironment
thatadds to i's socialincomewould
increasehisdemandforown goodsiftheyhad positiveincomeelasticities.
14 For [1 + a(1/1, - l)]/(l - a) > 1, since 1//3> 1, and 1 - a < 1.

15 An increasein a lowersh because the relativecontributionof own income to social
income is reduced.
1616 t
dnh(nR = constant = nR (1
1\d_ nR f2
dnh*- _1
da n n ,B n da
Both termsare greaterthan zero because /B< 1, and d/l/dx < 0 (thisis shownshortly);
therefore, > 0.
dnhldcL
If his own income were unchanged,his increasedexpenditureon own

goods would have to be "financed" by reduced contributionsto the
characteristics of others.Similarly,an increasein a social environment
thatsubtractsfromhis social income would increasehis expenditures on
othersand reduce his expenditureson own goods. Consequently,the
effectofa changein theenvironment is always (i.e., as long as own goods
are not inferior)partlyoffsetby induced changesin i's contributions in
the oppositedirection,regardlessof whetherthe environment adds to or
subtractsfromi's social income.
Geometrically, a change in the social envirnment is shownby a hori-
zontalmovementoftheendowedposition.An increasein theenvironment
shiftsthe endowmentin figure1 frompoint E1 to E2; the equilibrium
positionis changedfrompointe1 to a pointon a higherindifference curve
(e2), and i's contribution declinesfromh1toh2.In figure2,theequilibrium
is changedfrompointe1 to a pointon a lowerindifference curve (e2), and
i's contribution increasesfromh1 to h2.17
Ifboththeownand environment incomesofi changed,theeffect would
be a combinationofthosewheneach alone changed.For example,ifboth
incomesincreased,the effecton his contributions of the increasein the
environment would at least partlyoffsetthe effectof the increasein his
own income.In particular,ifbothincomesincreasedbythesamepercent-
age, thepercentagechangein contributions would be greaterthan,equal
to, or smaller than that percentageas his demand for characteristics
exceeded,equaled, or was less than unity.
Throughthe assumptionthatPRis constant,I have been assuming,in
effect,that expendituresand the social environmentare perfectsubsti-
tutesin producingcharacteristics ofothers.However,the qualitativeim-
plicationsofthisassumptioncan also be derivediftheyare simplybetter
substitutes foreach otherthanforown consumption-ifPR risesas h rises,
but not "too" rapidly.For example, a rise in the environmentwould
reducecontributions, and a risein own incomewould increasecontribu-
tionsby a relativelylargepercentageiftheenvironment and expenditures
on thesecharacteristics are simplyrelativelyclose directsubstitutes.
A risein the cost of changingthe characteristics of others(PR) would
induce the usual substitution(and perhaps income) effectsaway from
thesecharacteristics. If the environment were given,the absolutechange
in contributions would equal theabsolutechangein thesecharacteristics,
17 The endowment-income
elasticityof demand forcontributionscan easily be shown
to equal
Nh= .D = (NR 1) ( 1 + + 1
dD h 1-a
Clearly,when a > 0, Nh < 0 if NR < a = N, the average endowment-income

elasticity
of demand; and when a < 0, Nh > 0 if NR a,.
whilethepercentagechangeswould differaccordingto equation (2.8) in

thefollowingway:
Eh= -
dhPRI= +l-x
ER [1 ?(l/f3 1)1
)](2.10)
(same proofas in n. 13 above). Therefore,when a > 0, Eh would exceed

ER by an amountthatwould be greater,thegreatera and thesmallerf3.
Similarly,when a < 0, Eh would be less than E 18 by an amount that
would be greater,the greaterthe absolutevalue of a and the smallerfA
3. Applications
Three specificapplicationsofthegeneralanalysisofsocial interactionare
now considered:interactions amongmembersofthesame family,charity,
and envyand hatred.These applicationsnot onlyprovideempiricalsup-
portfortheincomeand priceimplications just derived,but also bringout
a numberof otherimplicationsofsocial interaction.
A. TheFamily
Assumethati caresabout his spouse in thesensethati's utilityfunction
dependsonj's welfare.'9I assume untilmuch laterin thissectionthatj
definethe
does not care positivelyor negativelyabout i. For simplicity,
variable measuringthisdependence,R., as follows:
R = + /ii - S. = (3.1)
whereIj isj's own income,hij are the contributions fromi toj, Sj isj's
social income,and xj are thegoods consumedbyj. The social incomeofi
can be derivedby substituting equation (3.1) into equation (2.6):
PxXi+ PRRi = Si = Ii + pRt, (3.2)

Px
resourcestoj. If i can transfer

wherePR is the price to i of transferring
resourcestoj withoutany "transactions"costs-presumably,these costs
are reducedby sharinga commonhousehold-and if i cares sufficiently
aboutj to have hij > 0, thenPR = px, and
Si = Pxi + p~x; = Ii + Ij = Iij (3.3)
18 I assume that an increase in the absolute value of PR reduces the demand forR,
so thatEh > 0.
19 Caringis notsimplya deusexmachina introducedto derivethefollowingimplications,
since I have shown elsewhere(Becker 1974) that the marriagemarketis more likely to
pair a personwith someone he cares about than with an otherwisesimilar personthat
he does not care about.
SOCIAL INTERACTIONS I075
+ Vj
IjjupXl=j l
slope- P
R, =x1
FIG. 3
The social income of i equals the combined own incomes of i and j, or the
"family's" own income. Moreover, the equilibrium condition given by
equation (2.7) implies that
aU I/ au. = __ - 1, (3.4)
or i would receive equal marginal utility from j's and his own
consumption.
Conditions (3.3) and (3.4) are shown in figure 3. Resources can be
transferredfrom i to j by moving along i's budget line in a southeast
direction fromthe endowed position at point Eo. The equilibrium position
is at point e, where the slope of i's indifferencecurves equals the slope of
his budget line ( = to -1 ). The vertical (or horizontal) interceptgives the
family's own income i's social income-deflated by the price of x.
An important implication of this analysis is that a change in the distri-

bution offamilyincome between i andj has no effectat all on the consump-
tion or welfare of either, as long as i continues to transferresources to
j. A change in the distributionwould be on the same budget line as E if
total familyincome is unchanged: the change fromE0 to El is nominally
more favorable toj, whereas the change to E2 is nominally more favorable
to i. Since there is only one point of tangency between i's budget line and
an indifferencecurve, the equilibrium position must be unchanged at e.
A shiftin favor ofj's income to El simply induces an equal reduction in
i's contributionstoj (fromhM.to hbin the figure), whereas a shiftagainst
j's income to E2 induces an equal increase in his contributions(fromhM'j to
htj)2
This discussion has assumed a two-person family but is equally appli-
cable to larger families that include grandparents, parents, children,
uncles, aunts, or other kin. If one member, call him the "head," cares
sufficientlyabout all other members to transfer general resources to
them,2' redistributionof income among members would not affect the
consumption of any member, as long as the head continues to contribute
to all.
The head's concern about the welfare of other members provides each,
including the head, with some insurance against disasters. If a disaster
reduced the income of one member alone, k, by say 50 percent, the head
would increase his contributions to k, and thereby offsetto some extent
the decline in k's income. The head would "finance" his increased contri-
bution to k by reducing his own consumption and his contributions to
other members; in effecteach member shares k's disaster by consuming
less. If k's share of familyincome were negligible, he would essentially be
fullyinsured against his own disasters because even a 50 percent decline
in his income would have a negligible effecton family income, and thus
on the consumption of each member. Since the share contributed by any
member would tend to be inversely related to family size, large families,
including the extended kinship family found in certain societies, can
provide self-insuranceespecially when old-age, health, and other kinds of
market insurance are not available or are very costly.22 Note that insur-
ance is automatically provided when resources are voluntarilytransferred,
20 If the utilityof i also partlydepended directlyon the amountshe transferred toj,

perhaps because i's "prestige" or "approval" partly depended on these transfers, then
redistribution offamilyincomewouldhave a net effecton the consumptionofboth i andj.
21 A somewhatweaker assumptionis that the familyis "fully connected" througha
seriesof transfers between members; for example, a transfersresourcesto b because a

cares about b, b transfers to the
to c because b cares about c, and so on untilm transfers
last member,n,and n transfers to no one (thisassumptionis made in an intergenerational
contextby Barro 1974). Indirectly,a (or any othermemberbut n) would be transferring
to all membersbecause an increasein his contributionsto b would induce an increasein
the contributionsto all othermembers.
22 The interaction betweenselfand marketinsuranceis analyzed in Ehrlich and Becker
(1972).
without the need for any member to have dictatorial control over the
family's allocation of resources.
The result on the unimportance of the distribution of income among
persons linked by transferscan also be used to understand the interaction
among generations.23 Suppose that the resources of the present generation
are changed at the expense of or to the benefitof the resources accruing to
future generations. For example, increased government debt or social
securitypayments are financed by increased taxes on futuregenerations,
or increased public investment,perhaps in schools, with benefitsaccruing
to future generations is financed by taxes on the present generation. If
present and future generations are fully connected by a series of inter-
generational transfers,called "bequests," then each of these apparent
changes in the relative resources of present and futuregenerations would
tend to be offsetby equal but opposite changes in bequests. In particular,
increased public debt would not raise the real wealth or consumption of
the present generation or reduce that of future generations because in-
creased taxes on future generations would be matched by increased
bequests to them. Similarly, increased public investment in education
would be matched by reduced private investmentin education.24
The budget constraintof the head is determined by total familyincome,
not his own income alone-equation (3.3) for a two-person family can
be readily generalized to many persons. Since the head maximizes his
utility subject to his budget constraint, anything that increased family
income would increase his utility.Therefore, the head would consider the
effecton total familyincome of his differentactions, and would forfeitown
income if the incomes of other familymembers were increased even more.
For example, he would not move to another city if his spouse's or child-
ren's income would be decreased by more than his own income would be
increased. Or, although children usually eventually set up their own
households and fullycontrol theirown incomes, the head would guide and
help finance their investmentsin education and other human capital to
maximize the present value of the real income yielded by these
investments.25
Put differently,the head automatically internalizes the "external"
effectsof his actions on other family members.26 Indeed, because the
23 This application is takenfromthe detailed discussionin Barro (1974).

24
The empiricalevidencedoes stronglysuggestthatmostof the investmentin higher
education by state governmentshas been offsetby reduced private investment(see
Peltzman 1973; McPherson,in preparation).
25 The incentivethat parentshave to investin their children is discussed in several
places (see, e.g., De Tray 1973; Parsons 1974).

26 The Coase Theorem proves that when "bargaining costs" are negligible, each
familymember could always be induced to maximize family opportunitiesthrough
bargaining with and side paymentsfromothermembers.I have proved that the head
(and, as shown later, other memberstoo) has this incentive and, in effect,makes or
receives "side payments" without bargaining with other members.The word "auto-
matically" is used to distinguishthistheoremfromthe Coase Theorem.
head maximizes familyincome, he fullyinternalizes these externalitiesnot

only when the income of differentmembers but also when their consump-
tion, the other side of the budget constraint,is directlyaffected.He would
take an action directlyaffectingconsumption only when either the value
of any increase in his consumption exceeded the value (to him) of any
decrease in other members' consumption, or when any decrease in his
own was less valuable than the increase in theirs.2 7
For example, he would read in bed at night only if the value of reading
exceeded the value (to him) of the loss in sleep sufferedby his wife, or he
would eat with his fingersonly if its value exceeded the value (to him)
of the disgustexperienced by his family.The development of manners and
other personal behavior "rules" between family members well illustrates
how apparent "external" effectscan be internalized by social interaction
between members.
Note too that not only is the head better offwhen his utilityis raised,
but so too are other members of his family, even if his actions directly
reduce their consumption or increase their discomfortand disgust. For
if his utilityis raised and if their welfare has a positive income elasticity
to him, he would increase his contributionsto them by more than enough
to offsettheir initial losses. For example, if he benefitsfrom reading at
night, his wife does too because he more than compensates her for her
loss of sleep. 2 8
The head maximizes a utilityfunctionthat depends on the consumption
of all familymembers subject to a budget constraintdetermined by family
27 Although this is a rather immediate implication of his interestin maximizing
familyopportunities,a directproofmay be instructive.Suppose that a particularaction

changed the utilityof the head by
dUh = nmUhdxh + E muidxj, ( 1)
j= 1, th
where mzu= aUhI%, and dxj measuresthe change in consumptionof the jth family
member.If the head can transferresourcesto othermembersdollar fordollar, in equi-
librium,
muO = 4hPj allj, (2')
wherei,, is the marginalutilityofincometo the head, and pj is the costofxj. Substitution
of eq. (2') into (1') gives
dUh = Ah(phdXh + E pjdXJ) = h pidX3.
(3')
i= 1, 7 h all i
Since the head takes an action if and only if dUh > 0, eq. (3') implies (since Ah > 0)
thathe takesan action if,and only if,
E PfdxJ> O. (4')
which was to be proved. all j
28 Recall that I have been assuming that only a single good is consumed by each
person,althoughthisanalysispresupposesmany goods. The transitionto many goods is

straightforward ifthe head's utilitydependson a functionofthe variousgoods consumed
by anothermemberthatis monotonicallyrelated to the utilityfunctionof that member
(see the discussionlater in thissection).
SOCIAL INTERACTIONS I079
income and family consumption. Therefore, the effect of a change in

relative prices of goods, or in aggregate family income (as well as in its
distribution) on a family's consumption of differentgoods, could be pre-
dicted solely from the head's utilityfunction and a budget constraint on
family variables. The usual substitution and income effectsof demand
theorywould be fullyapplicable.
In this sense, then, a familywith a head can be said to maximize "its"
consistent and transitive utility function of the consumption of different
members subject to a budget constraint defined on family variables. The
"family's" utilityfunctionis identical with that of one member, the head,
because his concern for the welfare of other members, so to speak, inte-
grates all the members' utility functions into one consistent "family"
function.
That is, a "family's" utility function is the same as that of one of its
members not because this member has dictatorial power over other
members, but because he (or she!) cares sufficiently about all other mem-
bers to transferresources voluntarily to them. Each member can have
complete freedom of action; indeed, the person making the transfers
would not change the consumption of any member even with dictatorial
power! For example, if i had dictatorial power, he could move the equili-
brium position e in figure 3 to the vertical axis (or anywhere else), but
would not choose to move it because his utility partly depends on j's
consumption.291
Nothing much has yet been said about the preferencesof members who
29
It is difficultto contrastmy derivationof a "family" utilityfunctionwith a tra-
ditionalderivation,since explicitderivationsare rare. The mostexplicitappears to be in
a well-knownarticleon social indifference curvesby Samuelson (1956). He considersthe
problemofrelatingindividualand familyutilityfunctions,but his discussionis briefand
the argumentssometimesare notspelled out. Withoutsufficient elaboration,he refersto a
consistent"familywelfarefunction"being graftedonto the separate utilityfunctionsof
different familymembers(p. 10). In addition, he says that a familymember's "pre-
ferencesamong his own goods have the special propertyof being independentof the
othermembers'consumption.But since blood is thickerthan water, the preferencesof
the different membersare interrelatedby what mightbe called a 'consensus' or 'social
welfarefunction'which takes into account the deservingnessor ethical worthsof the
consumptionlevels of each of the members."How are thesepreferencesinterrelatedby
a "consensus,"and should not the "deservingness"of the consumptionlevelsof different
memberssimplybe incorporatedintodifferent members'preferences (as in myapproach)?
Incidentally,at one point (p. 9), Samuelson appears to believe that if the familyutility
functionis the same as the head's, he musthave sovereignpower, which I have shown
is not necessary.He later (p. 20) says that "if withinthe familytherecan be assumed to
take place an optimalreallocationofincomeso as to keep each member'sdollar expendi-
tureof equal ethical worth,thentherecan be derivedforthe whole familya set of well-
behaved indifference contoursrelatingthe totalsof what it consumes:the familycan be
said to act as if it maximizes such a group preferencefunction" (italics in original).
In my analyses, the "optimal reallocation" results from interdependentpreferences
and voluntarycontributions, and the "group preferencefunction"is identical with that
of the "head."
Io8o JOURNAL OF POLITICAL ECONOMY
are not heads. The major, and somewhat unexpected, conclusion is that if
a head exists, othermembers also are motivatedto maximizefamily incomeand
consumption, evenif theirwelfaredependson theirown consumption alone. This is
the "rotten kid" theorem (I owe this name to the Barro family). For con-
sider a selfishmember j who can take an action that would reduce his
income by b, but increase that of another member k by c. Initially,j would
be worse offby b, since the gain to k is of no direct concern to him. How-
ever, if c = b, the head would transferenough additional resources toj
fromk to leave him (and k) equally well off,since intrafamilyreallocations
of income do not affect the consumption of any member. Moreover, if
c > b iffamilyincome were raised byj's action-and ifj's welfare were
a superior "good" to the head, then he would transferenough additional
resources to j to make j better off. Consequently, even a selfishj would
only undertake actions that raised family income or consumption,
regardless of the initial impact on him.
In other words, when one member cares sufficientlyabout other mem-
bers to be the head, all members have the same motivation as the head to
maximize family opportunities and to internalize fully all within-family
"externalities," regardless of how selfish (or, indeed, how envious) these
members are. Even a selfish child receiving transfersfrom his parents
would automatically consider the effectsof his actions on other siblings as
well as on his parents. Put still differently,sufficient"love" by one mem-
ber guarantees that all members act as if they loved other members as
much as themselves. As it were, the amount of "love" required in a
family is economized: sufficient"love" by one member leads all other
members by "an invisible hand" to act as if they too loved everyone.
Armed with this theorem, I do not need to dwell on the preferencesof
nonheads. Of course, just as there may be no head if all members are
sufficientlyselfish,so there may be none if they are all sufficientlyaltru-
istic. Each would want to transferresources to other members, but no
one would want to accept transfers.Aside from that, mutual interaction
or mutual interdependence of welfare raises no particular problems.30
30 It frequently oftheform
has beenallegedto methatmutualinteraction
U1 = U[xt, gX(U)]
Ui = Ui[xi, gJAU)],
wherexiandxj aretheownconsumption ofi andj, andgiandgj aremonotonic functions
oftheutility indexesU, and Up,results in instabilityand unboundedutilitylevels.For
it is argued,an increasein xi byoneunitdirectly whichraisesj'sutility
raisesi's utility,
through gj, whichin turnfurther and so on,untilUtand Uj approach
raisesi's utility,
infinity.Mathematically, thereis an infiniteregress,since,bysubstitution,
U, = U,[x,,g,{x, gj{x,,g, {xi, gj {... }].
However,withappropriate the
on the magnitudeof the interactions,
restrictions
infinite has a finiteeffect,
regress and the"reducedforms"of U, and Uj on xi and Xj
SOCIAL INTERACTIONS i o8 i
By assuming in figure 3 and in the formal development given by equa-

tions (3.1)-(3.4) that only a single good is consumed by each person, I
eliminated any distinctionbetween transferringgeneral purchasing pow-
er and transferringparticular goods to another member. If each member
consumes many goods, the conclusions in this section about family
utilityfunctions,internalization of within-familyexternalities, and so on
fully hold only if the head is content to transfer general purchasing
power. He would transferin this form if his utility function depended
on the utility of other members-that is, if his utility function could be
writtenin the form
Uh = Uh[Xh 1') *, Xhm5g1(X2 1, .. *X2m), ... * gnX(Xn, * * )m)] (3.5)

where xij is the quantity of theijth good consumed by the ith person, and
dgi = (E0 d=
implies that the utility of the ith person is unchanged. If he is concerned

not about the utility of other members but about their consumption of
particular "merit" goods, the conclusions can be quite different.The
systematicdiscussion of merit goods is postponed to Section 3C.
If parents are transferringresources to their children in the form,say,
of giftsand expenditures on education and other human capital or after
they die in the formof bequests, then an increase in the income of parents
by a given percentage would tend to increase contributionsto children by
a still larger percentage, certainly by one exceeding the increased welfare
of their children (see the discussion in Section 2). In other words, contri-
butions to children can be very responsive to a change in parental income
without the welfare of children being so responsive.
Empirical evidence on bequests, gifts, and many other transfersto
children is seriously deficient. The general impression is, however, that
arewelldefined. forexample,theCobbDouglasfunctions
Consider,
U, = XfaiUfb
= XafUbf
are greaterthanzero,and bi and bj can eitherbe greater

whereal and aj presumably
thanorlessthanzero.Bysubstitution,
Us = Xai/( 1-bjbj)XjajbL)/(1-bibj) = Xxfli
= XgajbJ)/(1-bibj)Xjaj/( 1-bbj) = x1jxj,
wherebibjis independent of monotonic on U, and Up.A finite

transformations sumto
theregress thatthemarginalutilities
requiresthatIlbbjl< 1; essentially, or disutilities
due to interdependence are lessthanunity.Notethatalthoughit is possibleforat = bi
and aj = bj, forown consumption and thewelfareof theotherpersonto be equally
or 1J1ji > lajl,
"important," the condition IbibJI< 1 implies that either jail > 1,8il,
orboth;thatis,forat leastoneofthepersons, ownconsumption hastobe moreimportant
thantheotherperson'sconsumption in the"reducedforms."
io82 JOURNAL OF POLITICAL ECONOMY
bequests have a very high income elasticity. Moreover, the elasticity of

expenditures on children's education with respect to parental income does
appear to be above unity (Schultz 1967, p. 9), which is consistentwith the
implications of the theory.
The responsiveness of expenditures on children's education and other
trainingand skills to parental income has oftenbeen noted, and lamented
as evidence of immobility and rigid "class" structure. Yet my analysis
implies that the welfare of children-a measure of their "class"-rises by
a smaller percentage than parent expenditures on them, and possibly
even by a smaller percentage than parental income. Put differently,con-
siderable regression toward the mean across generations-that is, the
expected income or other measure of the position of children would be
much closer to the average position than is that of their parents-can be
observed at the same time that contributionsto children are very respon-
sive to parental income. 31
The crucial point is that considerable regression toward the mean
across generations would occur partly because of genetic factorsand luck
if all parents spent an equal amount on their children. As a result of this,
and given interdependent preferences, higher-income parents tend to
spend considerably more on their children than lower-income ones. How-
ever, these expenditures would only tend to dampen but not eliminate the
31
In one study,the elasticityof children'syearsof schoolingwith respectto parental
income is a sizeable + 1.2, at the same time that the elasticityof children'sincome
with
respect to parental income is only +0.3, or a 70 percentregressiontoward the mean
(unpublished calculations by Jacob Mincer fromthe Eckland Sample). Note in this
regard,however,that parentscannot easily preventconsiderableregressiontoward the
mean by investingin their children. For let the relation between the human capital
investedin childrenand parentalincome be
SC = a + b log IP + u,
whereb is the elasticityof parentalresponse,and u representsother determinantsof SC.
According to the theoryof investmentin human capital (Mincer 1974; Becker 1975
[in press]),
log IC = a + rSc + v,
where r is the rate of returnon human capital, and v representsotherdeterminantsof
log IC. Then by substitution,
log IC = (a + ra) + rblog I, + (ru + v).
Even if r were as large as 0.2, and b as large as 2.0, rbwould only be 0.4: the regression
toward the mean would be 60 percent.If v = c log Ip + v', where 1 - c measuresthe
degree of "intrinsic"regressionto the mean, thenby substitution,
log IC = (a + ra) + (rb + c) log Ip + (ru + tv').
Since the analysis in the text implies that b would be positivelyrelated to 1 - c as
parentstryto offsetthe "intrinsic"regression,the "observed" regressionto the mean,
1 - y = 1 - (c + rb) = ( 1 - c) - rb,
may be only weakly related to and also is less than the "intrinsic" regression1 - c.
I am indebted to discussionswithJacob Mincer on the issues sketchilycovered in this
footnote.
regression toward the mean. Therefore, the elastic response of contribu-

tions to children can give a very biased picture of the degree of immobility
or inheritance of "class" position. Indeed, contributions would be more
responsive to parental income the strongerare the basic forcesproducing
mobility because parents attempt to offsetthese forces. In other words,
an elastic response of contributions to parental income may be evidence
of sizeable mobility!3 2
B. Charity
If someone makes contributionsof time or goods to unrelated persons or
to organizations, he is said to be "charitable" or "philanthropic." The
discussion of contributions within a family indicates that charitable
behavior can be motivated by a desire to improve the general well-being
of recipients.33 Apparent "charitable" behavior can also be motivated by
a desire to avoid the scorn of others or to receive social acclaim. Not much
generality is sacrificed, however, by only considering charity motivated
by a desire to improve well-being.34
The numerous implications about family behavior developed in the
previous section fullyapply to the synthetic"family" consistingof a chari-
table person i and all recipients of his charity. For example, no member's
well-being would be affectedby a redistributionofincome among them, as
32 It is generallybelieved that the United States has a more mobile "open" society
than European countries do; yet (admittedly crude) comparisons of occupational
mobilitybetween fathersand sons do not reveal large differencesbetween the United
States and several Western European countries (Lipset and Bendix 1959). Since the
analysis in this paper suggeststhat parents' contributionsto theirchildren'seducation
and other trainingis more responsiveto parental position in "open" societies,more
responsiveparental contributionsare probably offsettingthe greater "openness" of
Americansociety.
3 3The Random HouseDictionary
oftheEnglishLanguage(unabridged,1967) definescharity
as "the benevolentfeeling,especiallytowardthosein need or in disfavor."
34 The utilityfunctionof a charitablepersonwho desiresto improvethe generalwell-
being of recipientscan be writtenas
Ui = Uixi Xj ( -
Pi- )]
whereh is his charitalbegiving,xj measuresthe well-beingof recipients,and aU/lIj =
aUjIah > 0; that is, a unit increasein the own income of recipientshas the same effect
on the utilityof a charitablepersonas a unit increasein his giving.The utilityfunction
ofa personwho makes"charitable" contributionsto win social acclaim can be writtenas
U. U, xi IJ A
where still aUjiah > O-an increase in his contributionswould increase his acclaim-
but now the sign of aU1/Ij is not so obvious. If, however,contributionsand the income
of recipientswere much closer substitutesforeach otherthan forthe own consumption
ofthecontributor, whichis plausible,thentheseutilityfunctionshave similarimplications.
Not much generalityis sacrificed,therefore, by only consideringcharitymotivatedby a
desireto improvethe well-beingof recipients.
long as i continued to give to all of them. For he would simply redistri-

bute his giving until everyone losing income was fully compensated and
everyone gaining was fully"taxed." Moreover, all members, not simply i,
would tryto maximize "family" opportunitiesand "family" consumption,
instead of their own income or consumption alone. In addition, each
member of a synthetic "family" is at least partly "insured" against
catastrophes because all other members, in effect,would increase their
giving to him until at least part of his loss were replaced. Therefore,
charityis a formof self-insurancethat is a substituteformarket insurance
and government transfers.Presumably, the rapid growth of these latter
during the last 100 years discouraged the growth of charity.
According to the analysis in Section 2, an increase in the income of a
charitable person would increase his charitable giving by a greater
percentage than the increase in the well-being of recipients. Indeed, his
income elasticityof demand for giving would exceed unity, possibly by a
substantial amount, as long as his elasticityof demand fortheirwell-being
(which I will call his demand forcharity) was not much below his average
income elasticity. The available evidence on charitable giving clearly
supports this implication of the theory: income elasticities estimated by
Taussig (1965) fromgiving in differentincome classes in 1962 are all well
above unity, ranging from a low of + 1.3 in the under $25,000 class to a
high of +3.1 in the $100,000-$200,000 class.35
A crucial implication of charitable giving in terms of social interaction
between the giver and others is that an increase in the incomes of recip-
ients would reduce giving. Therefore, an increase in the incomes of both
recipientsand givers should not increase giving by as much as an increase
in the incomes ofgiversalone. These implications are tested and confirmed
by Schwartz (1970), who analyzes aggregate time series on incomes and
charitable giving in the United States between 1929 and 1966 and also
compares his findingswith the cross-sectional findingsof Taussig (1965)
reported above. 3 6
The usual theory of consumer choice ignores social interactions, and
would consider charitable giving simply as a "good" that enters the
3 Theseestimates are netofdifferences in tax rates.Note,however, thatcharitable

givingis estimatedfromitemizeddeductions in personalincometaxreturns. Sinceonly
and notto individuals
givingto (certain)institutions can be deducted,sincemanytax-
withlowerincomes,do notitemizetheirdeductions,
payers,especially and sinceothers
inflatetheirdeductions,theresponse oftax-reported givingmaynotaccurately describe
theresponse ofactualgiving.
36 Schwartz's
study,likeTaussig's,is basedonpersonal incometaxreturns.Bothstudies
also estimatethepriceelasticityofgiving,wherepriceis measuredby one minusthe
marginaltax rate.Schwartzfindsconsiderable responseto price,elasticities
generally
exceeding- 0.5, whichis consistent withtheimplications ofthetheory ofsocialinter-
actions.Taussig,on theotherhand,findsonlya weakresponse to price;but Schwartz
arguesthatTaussig'sfindings are biaseddownward.
giver's utilityfunctionalong with his other goods:
Uj = Ui(xi, A) , (3.6)
where h measures the amount given by i, and xi are the other goods that
he consumes. This "conventional" approach does not imply that an
increase in i's income would increase his giving by a particularly large
percentage, or that an increase in the incomes of recipients would lower
his giving. Therefore, considerable ad hocery would be required if the
"conventional" approach were to explain the evidence on charitable
giving that is more readily explained by an approach that incorporates
social interactions.
These findingscan be used to make very crude, but instructive,calcula-
tions of the share of recipient's own incomes in the social incomes of
contributors. If the own-income elasticity of demand for giving is taken
from Taussig as +2.0, the share of own income spent on giving as 0.04
(see Schwartz 1970, p. 1278), and the income elasticity of demand for
charity as equal to the average income elasticity (actually, Schwartz's
findingssuggest that it may be lower than the average), then, according
to equation (2.9), charity's share in social income would be (2 - 1)/(1/
0.04 - 1) 0.4. If the own-income elasticity of giving were taken as
+ 3.0 rather than + 2.0, charity's share would double to 0.08; if, in
addition, the income elasticity of charity were only four-fifthsof the
average elasticity,its share would increase furtherto 0.1 1 (a tithe?).
C. Merit Goodsand MultipersonInteractions
Contributors are content to transfergeneral purchasing power to recip-

ients if they are concerned about the general welfare or utility of recip-
ients-as seen by recipients. They want to restrict or earmark their
transfers,on the other hand, if they are concerned about particular
"merit" goods consumed by recipients. For example, parents may want
transfersto their children spent on education or housing, or only the
money incomes rather than "full" incomes of children may be of concernto
parents, or contributors to beggars may not want their giving spent on
liquor or gambling.
Assume, therefore,that i transfersresources toj that are earmarked for
particular goods consumed by j because the utilityfunction of i depends
not only on his own goods but also on these goods ofj. Ifj were permitted
to spend his own income as he wished, an assumption modified shortly,he
would spend less on these goods as a result of the earmarked transfersfrom
i. Clearly, the reduction in his own spending would be greater, the
greater the transfer,the smaller the fractionof his social income spent on
these goods, and the smaller their income elasticity. For example, if they
take 20 percentof his social incomeand have an incomeelasticityequal

to 2.0, he would reduce his own spendingby $0.60 for each dollar
earmarkedby i.37
As longasj continuesto spendon themeritgoods,earmarkedtransfers
are worthas much toj as a transferof general purchasingpower with
equal monetaryvalue. Moreover,i would not have a greatereffectonj's
consumptionof thesegoods withearmarkedtransfers than withgeneral
transfers.Therefore,as long as j continuesto spend on thesegoods,ear-
marked transfersare equivalent to general transfers;and the results
derivedforthelatterfullyhold fortheformer.For example,a redistribu-
tionofincomebetweeni and j would have no effecton the consumption
ofeitheras longas bothcontinueto spendon themeritgoods,orbothi and
j wantto maximizetheircombinedincomes,nottheirown incomesalone.
On the otherhand, ifj did not want to spend anythingon the merit
goods because earmarkedtransfers large,such transfers
were sufficiently
would be worthless toj and moreto i thanwould generaltransfers with
equal moneyvalue. Moreover,variousresultsderivedforgeneraltransfers
no longerhold: forexample,a redistribution ofincometoj and away from
i would reducej's consumption of meritgoods and increasehis consump-
tionofothergoods.
If i wereaware thatj reducedhis spendingon meritgoods whentrans-
fersincreased,i would be discouragedfromgivingbecausej's reaction
raisesi's privatepriceof meritgoods to
1 1
PM=
= 38 (3.7)
PM1 rj Vmfnm
wherePmis the marketprice of meritgoods, and the other termsare

definedin note 37. Similarly,ifj were aware thati reducedhis transfers
whenj increasedhisspendingon meritgoods,j would also be discouraged
fromspendingbecause i's reactionraisesthepricetoj. Indeed,j could end
up consumingfewermeritgoods than he would ifi were not concerned!
That theseinducedreactionsare notsimplyhypothetical or alwaysminor
is persuasivelyshown in a recentstudyof highereducation (Peltzman
1973). Statesearmarktransfers to highereducationmainlythroughhighly
subsidizedpublic institutions.Privatespendingwas apparentlyreduced
by (at least) $0.75 per dollar of public spendingin 1966-67; private
spendingmay have been reducedby morethan $1.00 per dollarofpublic
spendingin 1959-60, so that totalspendingon highereducationin that
yearwould have been reducedby public spending.
3 It is easily
shown thatrj = 1 - Vmnm, where Urnis thesharespentonmerit goods;
nm,theirincomeelasticity; and rj, thereductioninj's ownspendingperunitincrease
in i's contribution.
Therefore,ifvm= 0.2, and nm= 2.0,rj = 0.6.
38 For example, ifj spent$0.60 lessforeach dollartransferredby i, the price to i
wouldbe p_ =pm(1/0.4)= 2.5Pm' ormorethantwicethemarket price.
SOCIAL INTERACTIONS Io87
Both i and j want to limitthe induced reactionsof the otherbecause

such reactionsreflectthe incentiveto "underreveal"preferences about
meritgoods and "free-ride"in theirconsumption.Since equation (3.7)
showsthatthesereactionsraisethepriceofmeritgoodsto i andj, in effect,
bothwant to lowertheseprices.Indeed, it is well knownfromthetheory
of public goods,and a meritgood is a particularkindof "public" good,
thatefficient pricesto i andj would be lessthanthemarketprice; indeed,
theseefficient priceswould sumto the marketprice of the meritgood.39
Efficient pricesmightbe achieved,forexample,by i andj matchingeach
other's spending in specifiedproportions,or each might be given a
spendingquota.
I intentionallysay "might"be achievedbecause any agreementhas to
be "policed" to insurethat each lives up to his commitment.Policing
is relativelyeasy forthe consumerof the meritgoods,j, since he usually
automaticallyknowshow much is spentby i, but is much moredifficult
fori, since he does not automaticallyknow how much is spentbyj.40
Parentsmay use theirchildren'sgradesin schoolto measuretheinputof
timeand effort by childrenthatpresumably"matches" the moneycon-
tributionby theparents.4'Or parentsmay save a largepartoftheirtotal
transfer to childrenfora bequest when theydie in orderto providean
incentivefor children to spend "appropriately,"at least while their
parentsare alive.42This mayexplainwhytheinheritancetax on bequests
apparently has induced relativelylittle substitutiontoward gifts to
children(see Shoup 1966; Adams 1974).
The "underrevealing,""free-riding,"coordinationof efforts,and
"policing"discussedformeritgoods are commonto all multiperson inter-
actions-that is, all situationswheretwo or morepersonsare affectedby
the consumption,attitudes,or otherbehaviorof the same person.The
analyticalissues formultipersoninteractionsare the same as forother
"public" goods: is public interventiondesirable-for example, should
charitablegivingbe deductiblefrompersonalincome in arrivingat tax
liabilitiesin order to lower the privateprice of giving-and do private
equilibria withoutgovernmentinterventionmore closely approximate
joint maximization,a Nash noncooperativegame solution,or something
quite different? Since space is limited,I refrainfromdiscussingfurther
theseand relatedissues.
3 A proofof thiswell-knownsummationformulacan be foundin Samuelson (1954).

40 The difficultyof policing "merit" goods is shown amusinglyin a recentWizard of
Id cartoon. Two drunksmeet, and one says, "Could you spare a buck fora bottle of
wine?" The otheranswers,"How do I knowyou won't buy food with it?"
41 I owe thisexample to Lisa Landes.
42 This conclusionabout the incentivesprovidedby large bequestsis a special case of
a more general result proven elsewhere (see Becker and Stigler 1974) that relatively
largepensionsdiscourageemployeesfromactingcontraryto theinterests oftheiremployers
(a bequest servesthe same purpose as a pension).
D. EnvyandHatred
An enviousor maliciouspersonpresumablywould feelbetteroffifsome
otherpersonsbecome worse offin certainrespects.He could "harm"
himself(i.e., spendhisown resources)in orderto harmothers:in figure2,
he givesup *o unitsof his own consumptionin orderto harm othersby
hounits.The termsof trade between his own harm and the harm to
others,given by the curve EOSl in figure 2, is partly determined
by his skill at "predatory"behavior and partlyby public and private
expenditures to preventcrime,libeling,maliciousacts,trespass,and other
predatorybehavior. Since an increasein these expenditureswould in-
crease the cost to him of harmingothers,he would be discouragedfrom
harmingthem.The limitedevidenceavailable on predatoryexpenditures
supportsthisimplicationof the theory.Crimesagainst personsprovide
some evidenceon predatorybehavior,since most assaultsand murders
probably are motivatedby the harm to victims.43The frequencyof
assaults and murder (and also crimesagainst property)apparentlyis
stronglynegativelyrelatedto the probabilityof conviction,punishment,
and othermeasuresof the cost of committingthesecrimes(see Ehrlich
1973).
Section 2 suggeststhat a rise in own income would tend to reduce
predatoryexpenditures.An increasein the social environment,44 on the
other hand, would necessarilyincrease these expenditures,unless own
consumption werean inferior good. Therefore,a risein thesocialenviron-
mentand own incomeby the same percentagewould reduce predatory
expenditures by less than would a rise in own income alone, and might
even increasethem.
Again, the implicationsof the theorycan be testedwithevidenceon
crimes against persons. Since assaults and murdershave been more
frequentat lowerincomelevels,45an increasein own incomeappears to
reduce crimesagainst persons,if differences in own income alone are
measuredby differences in theincomesofindividualsat a momentin time
(as in thediscussionofcharityin Section3B). As predictedby thetheory,
an increasein own income that is accompanied by an increasein the
social environment (as measuredby the incomeof others)does not have
such a negativeeffecton thesecrimes.Indeed, the frequencyof assaults
and murdershas not been reduced by the sizeable growthin aggregate
incomesduringthe last 40 years,nor do higher-income statespresently
have fewercrimesagainstpersonsthan otherstates.46
43Most robberies,burglaries,and larcenies,on theotherhand, probablyare motivated

by the prospectsof materialgain.
44 That is, in thatpartofthesocial environmentthatmotivatespredatoryexpenditures.
45 Persons committingcrimes against other personsas well as against propertyare
much more likely to live in low income areas (see Crime Commission 1967a, table 9).
46 The rate of assaultsgrewsignificantly from1933 to 1965 in the United States, and
the murderrate remainedabout the same (Crime Commission1967b,figs.3, 4). Higher-
SOCIAL INTERACTIONS Io89
Over theyears,evenacute observersofsocietyhave differed radicallyin

theirassessmentof the importanceof envy and hatred. Two hundred
years ago, for example, Adam Smith recognizedthese "passions" but
shuntedthemaside withthecomment:"Envy,malice,or resentment, are
the only passionswhich can promptone man to injure anotherin his
personor reputation.But thegreater partofmenarenotvery frequentlyunder
theinfluence
ofthose
passions,and theveryworstmenare so onlyoccasionally.
As theirgratification too, how agreeable soever it may be to certain
characters,is not attendedwithany real or permanentadvantageit is in
thegreaterpartofmencommonlyrestrained byprudentialconsiderations.
Men may live togetherin societywithsome tolerabledegreeof security,
thoughthereis no civil magistrateto protect themfromtheinjusticeof those
passions"(Smith 1937; my italics)."' To ThorsteinVeblen, on the other
hand,writingmanyyearslater,theremotivesare theverystuff oflifethat
dominateeverything else: "The desireforwealthcan scarcelybe satiated
in any individualinstance,and evidentlya satiationof the average or
general desire for wealth is out of the question. However widely, or
equally,or 'fouly,'it may be distributed,no generalincreaseof the com-
munity'swealth can make any approach to satiating this need, the
groundof which is the desireof everyoneto excel everyoneelse in the
accumulationofgoods" (Veblen 1934,p.32).4 8
In principle,theimportanceofenvyand hatredcan be measuredusing
equation (2.9) by the contribution of the relevantsocial environment to
social income; this is done in a crude way in Section 2B for charity.
Unfortunately, not enough information is available eitheron the own-
incomeelasticityof demand or on the fractionof own income spenton
"predatory" behavior to make even crude estimatesof the relative
contribution ofenvyand hatred.
Still,it may be usefulto noteseveralimplicationsofthediffering views
about the significance of envyand hatred.For example,Veblen's belief
that the welfareof a typicalperson primarilydepends on his relative
income positionimpliesthat social income essentiallyis zero: that the
value of the social environmentcausing envy would exactly offsetthe
value of own income.49 For then,and only then,would a rise in this
income states do not have fewercrimes against personseven when the probabilityof
conviction,the punishment,and several other variables are held constant (Ehrlich
1973, tables 2-5). Note that Ehrlich's study,unlike the evidence fromthe Crime Com-
mission,holds the "price" of crime constantwhen estimatingthe effectsof income (and
holds income constantwhen estimatingthe effectsof price).
"4 Not much later, JeremyBentham reached a similar conclusion: "The pleasure
derivable by any person fromthe contemplationof pain sufferedby another,is in no
instanceso great as the pain so suffered"(Bentham 1952-54).
48 Similarly, a sociologistrecentlyhas arguedthatenvyis a powerfulmotivein primitive
as well as advanced societies,communistas well as capitalist ones, and is critical in
determiningeconomicprogressand public policy (see Schoeck 1966).
41 "Own" income here includes the value of other
aspects of the social environment.
social environment
and own incomeby the same percentage,pricesheld
constant, not affectsocial income or welfare. That is, a rise in all incomes
in a community by the same percentage would not improve anyone's
welfare in Veblen's world. 50
If social income were negative, if the environment causing envy were
more important than own income, a rise in the environment and
own income by the same percentage would lower social income and
welfare. That is, a general rise in incomes in a more extreme Veblenian
world would actually lower welfare! 5
On the other hand, Smith's belief that envy is a relativelyminor deter-
minant of welfare implies that social income is positive: the environment
causing envy is less important than own income. A rise in the environment
and own income by the same percentage would then raise social income
and welfare. That is, Veblen's general rise in the community's income
would raise the welfare of the typical person.
4. Summary
This essay uses simple tools of economic theory to analyze interactions
between the behavior of some persons and differentcharacteristicsof other
persons. Although these interactionsare emphasized in the contemporary
sociological and anthropological literature, and were considered the
cornerstone of behavior by several prominent nineteenth-centuryecono-
mists, they have been largely ignored in the modern economic literature.
The central concept of the analysis is "social income," the sum of a
person's own income (his earnings, etc.) and the monetary value to him
of the relevant characteristics of others, which I call his social environ-
ment. The optimal expenditure of his own income to alter these character-
istics is given by the usual marginal conditions. By using the concept of
social income, I can analyze the effecton these expenditures of changes in
differentsources of income and in differentprices, including the "price"
of the social environment. Perhaps the most important implication is
that a change in own income alone would tend to cause a relatively
large change in these expenditures; in other words, the own-income
elasticity of demand for these expenditures would tend to be "large,"
certainlylarger than the elasticityresultingfromequal percentage changes
in own income and the social environment.
50 If U1 = Ui(Ii/I), where I is the average communityincome, then Si = Ii- pI,

whereSi is i's social income, and p, is the price of fin termsof Ii. If i did not engage in
predatorybehavior,p, would simplyequal the slope of his indifference curve: slope =
dI/dI = Ii/ = pr. Hence Si = Ii -I/I* I = 0.
51 When envyis so important,economicdevelopmentis undesirablebecause it lowers
welfare.See Schoeck's(1966) discussionofwhathe calls "the envy-barrier ofthedeveloping
countries."
SOCIAL INTERACTIONS IO9I
Interactions among members of the same family receive the greatest

attention. The "head" of a familyis defined not by sex or age, but as that
member, if there is one, who transfersgeneral purchasing power to all
other members because he cares about their welfare. A family with a
head is a highly interdependent organization that has the following
properties:
A redistributionofincome among members does not affectthe consump-
tion or welfareof any member because it simply induces offsettingchanges
in transfersfrom the head. As a result, each member is at least partially
insured against disasters that may strikehim.
Not only the head but other members too act "as if " they "loved" all
members, even when they are really selfish,in the sense that they maxi-
mize not their own income alone but family income. As it were, the
existence of a head economizes on the amount of true love required in a
family.
A family acts "as if " it maximized a consistent and transitive utility
function subject to a budget constraint that depended only on family
variables. This utilityfunctionis the same as the head's not because he has
dictatorial power,but because his concern forthe welfareofother members
integratesall their utilityfunctionsinto one consistent"family" function.
Transfersfrom parents to children in the form,say, of schooling, gifts,
and bequests tend to be negatively related to what the income of children
would be relative to their parents in the absence of these transfers.
Therefore, the relative income of children inclusiveof transferscould be
unrelated or even negatively related to these transfers.Consequently, one
cannot inferanything about the stability across generations of economic
or social positions simply from knowing the relation between parental
position and the amount transferred.
More brieflytreated are charity and envy, with special attention to
the effectsof differentkinds of income change on charitable contribu-
tions and expenditures to alleviate envy. For example, the much higher
income elasticity of demand for charitable contributions estimated from
differencesin individual incomes at a moment in time than fromaggregate
changes in incomes over time is shown to be implied by this theory of
social interactions,but not readily by the traditional theory of choice.
From a methodological viewpoint, the aim of the paper is to show how
another relation considered important in the sociological and anthropo-
logical literature can be usefully analyzed when incorporated into the
frameworkprovided by economic theory. Probably the main explanation
for the neglect of social interactions by economists is neither analytical
intractability nor a preoccupation with more important concepts, but
excessive attention to formal developments during the last 70 years. As a
consequence, even concepts considered to be important by earlier
economists, such as social interactions,have been shunted aside.
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A Theory of Social Interactions

Author(s): Gary S. Becker

This essayuses simpletoolsof economictheoryto analyze interactions

[Journalof Political Economy,1974, vol. 82, no. 6]

"No Man is an Island." [JOHN DONNE, Devotions upon

"Man is a social animal." [SENECA, De beneficiis]

Before the theoryof consumer demand began to be formalized by Jevons,

Over the years I have received helpful commentson a succession of draftsfrom

As greaterrigorpermeatedthe theoryof consumerdemand,variables

This essay incorporates a general treatment of interactions into the

Ui = Ui(Zl, ..,Zm) (2.1)

Zj = f](xj tj Ei, R Rj), (2.2)

pation, giving to charities, or having a beautiful house; or relieve his

I assume also (until Section 3C) that the effectofothervariables (including

PxX + PRh = Ii (2.5)

aui OUi = Px (2.7)

8 I have also developedthe analysisassumingmany commoditiesand many characteris-

If I did not want to purchase any R, PR would be a "shadow" price,

indifferencecurve. His equilibrium purchase of R is measured by the

incomewould differ fromhisown incomeevenifhe did notwantto spend

equation (2.6) withrespectto I, alone, i - wxn, + WRfR = 1-a,

where0 < /3< 1 is thefractionofown incomethatis spenton contribu-

13Since dh/dI = dR/dIi,

then clearly nh > 1R.'4 Moreover if n > i = 1 - a < 1, necessarily

Therefore, a j 0 as nh( l/nR) j 1, and information on nh, n/nR, and /3

14 For [1 + a(1/1, - l)]/(l - a) > 1, since 1//3> 1, and 1 - a < 1.

If his own income were unchanged,his increasedexpenditureon own

Clearly,when a > 0, Nh < 0 if NR < a = N, the average endowment-income

whilethepercentagechangeswould differaccordingto equation (2.8) in

(same proofas in n. 13 above). Therefore,when a > 0, Eh would exceed

PxXi+ PRRi = Si = Ii + pRt, (3.2)

resourcestoj. If i can transfer

An important implication of this analysis is that a change in the distri-

20 If the utilityof i also partlydepended directlyon the amountshe transferred toj,

seriesof transfers between members; for example, a transfersresourcesto b because a

23 This application is takenfromthe detailed discussionin Barro (1974).

places (see, e.g., De Tray 1973; Parsons 1974).

head maximizes familyincome, he fullyinternalizes these externalitiesnot

27 Although this is a rather immediate implication of his interestin maximizing

familyopportunities,a directproofmay be instructive.Suppose that a particularaction

person,althoughthisanalysispresupposesmany goods. The transitionto many goods is

income and family consumption. Therefore, the effect of a change in

By assuming in figure 3 and in the formal development given by equa-

Uh = Uh[Xh 1') *, Xhm5g1(X2 1, .. *X2m), ... * gnX(Xn, * * )m)] (3.5)

implies that the utility of the ith person is unchanged. If he is concerned

are greaterthanzero,and bi and bj can eitherbe greater

= XgajbJ)/(1-bibj)Xjaj/( 1-bbj) = x1jxj,

wherebibjis independent of monotonic on U, and Up.A finite

bequests have a very high income elasticity. Moreover, the elasticity of

regression toward the mean. Therefore, the elastic response of contribu-

long as i continued to give to all of them. For he would simply redistri-

3 Theseestimates are netofdifferences in tax rates.Note,however, thatcharitable

giver's utilityfunctionalong with his other goods:

C. Merit Goodsand MultipersonInteractions

Contributors are content to transfergeneral purchasing power to recip-

take 20 percentof his social incomeand have an incomeelasticityequal

wherePmis the marketprice of meritgoods, and the other termsare

Both i and j want to limitthe induced reactionsof the otherbecause

3 A proofof thiswell-knownsummationformulacan be foundin Samuelson (1954).

43Most robberies,burglaries,and larcenies,on theotherhand, probablyare motivated

Over theyears,evenacute observersofsocietyhave differed radicallyin

50 If U1 = Ui(Ii/I), where I is the average communityincome, then Si = Ii- pI,

Interactions among members of the same family receive the greatest

Adams, James D. "Asset Transfers at Deathtime." Dept. Econ., Univ. Chicago,

Uh = Uh[Xh 1') , Xhm5g1(X2 1, .. X2m), ... * gnX(Xn, * * )m)] (3.5)