  Keeping up with "The Joneses" matters. This paper examines a model of
reference dependent choice where reference points are determined by social
comparisons. An increase in the strength of social comparisons, even by only a
few agents, increases consumption and decreases welfare for everyone.
Strikingly, a higher marginal cost of consumption can increase welfare. In a
labour market, social comparisons with co-workers create a big fish in a small
pond effect, inducing incomplete labour market sorting. Further, it is the
skilled workers with the weakest social networks who are induced to give up
income to become the big fish.
