Status-seeking behavior, the evolution

of income inequality, and

growthPresented by Miyoung Oh

602Macro_ Spring2009

Introduction

Main idea

Status-seeking behavior affects

the evolution of income inequality

Status preferences: the higher relative income, the higher utility

When average income rises

Case 1: marginal utility of own income increases (KUJ)

Case 2: marginal utility of own income decreases(RAJ)

Income inequality shrinks over time in case1, it expands in case2.

Introduction

Status seeking preferences (past studies VS this paper)

Status desire(envy)

negative externality

Dynamic inefficiency

KUJ: Income inequality decreases

RAJ: Income inequality increases

KUJ

: keeping up with the Joneses

RAJ

: Running away from the Joneses

Initial ineuality?

- two periods OG model (continuum of HHs, no pop growth)

- two groups of Households (type i=1,2) with proportion

- : according to the levels of income(human capital holding) of adult agents in the initial period

- Young agents are endowed with one unit of time:They allocate a fraction of it to learning and a fraction to leisure

- Adult agents supply their human capital ,inelastically, and allocate their wage income to consumption, and educational expenditure,

• final goods are produced under a CRS (human capital is the only input)

# Learning technology

Step1 The model

Basic structure

)1(,

ite

itc

ith

Step1 The model

Preferences and the external effects on marginal utility

Where

where the function Vi (·) represents preferences for social status

* Preferences

* the external effects on marginal utility

the sign of determines KUJ or RAJ

Step1 The model

Individual’s behavior and solution of UMP(from FOC)

: constant fraction of income

on educational expenditure

The solution for this UMP is characterized by the following conditions:

Given state variables at t,

the levels of learning efforts of young agents, determine the state variables in the next period

* the mean of relative income,

* Let σt denote the measure of inequality

Step1 The model

States of the economy

* average level of human capital in period t + 1(from (4))

* Relative positions evolve (from (4), (8))

Step2 Equilibrium conditions

Ump condition +states equation + technology

* equations to determine lt, given the income distn(from (5c), (8))

From (9), (10) implies (11)

* The learning technology (from (4))

Step2 Equilibrium conditions

Lemma 1

Step2 Equilibrium conditions

Lemma 2

Step2 Equilibrium conditions

Lemma 3

Step3 Equilibrium with symmetric preferences

Proposition 1

Step3 Equilibrium with symmetric preferences

Proposition 1

Proposition 1 Suppose that there exists income inequality in the initial period of the economy, that is, (a)When the status preference function exhibits “keeping up with the Joneses”, income inequality in the economy is diminishing over time.

(b) When the status preference function exhibits “running away from the Joneses”, income inequality in the economy is expanding over time.

(1)We refer to the parameter Bi as the strength of status preferences of the type i agents, which is equal to V i (1), that is the marginal utility of relative income when the agent’s income is equal to the average.

(2) The parameters α and β are the elasticities of marginal utility of relative income. If the elasticity is larger (less) than unity, then Vi exhibits KUJ (RAJ).We restrict our attention to the case where the preferences of type 1 agents exhibit RAJ (0 < α < 1), and the preferences of type 2 agents exhibit KUJ (β > 1).

Step4 Equilibrium with asymmetric preferences

When the strengths of status preferences are identical ( )

Step4 Equilibrium with asymmetric preferences

Proposition 2

Step4 Equilibrium with asymmetric preferences

Proposition 2

In an economy where preferences are heterogeneous across two types of agents but strengths of status preferences are identical,

there exists a steady statewith perfectly equal income distribution. Such a steady state is locally stable when [(1−π)α + πβ] is larger than unity, whereas it is locally unstable when [(1−π)α + πβ] is less than unity.