The Spirit of Capitalism and Consumption Inequality

Yulei Luo (), Jun Nie and Heng-Fu Zou ()

No 616, CEMA Working Papers from China Economics and Management Academy, Central University of Finance and Economics

Abstract: In this paper we argue that Max Weber's (1904-05, German; 1958) theory on "spirit of capitalism" can be modeled via a direct preference for wealth. We incorporate the spirit of capitalism into a general equilibrium consumption-portfolio choice model to examine the effects on consumption inequality, equilibrium interest rate, and equity premium-an unexplored area in the literature. We provide closed-form solutions to help disentangle the effects of the spirit of capitalism in driving the key results. Quantitatively, we show that a small degree of the spirit of capitalism can improve the model's predictions in all three dimensions (consumption inequality, equilibrium interest rate, and equity premium) simultaneously. We show our results are robust to more general specifications on the income process and to incorporating macroeconomic rare disasters. Finally, we compare the spirit of capitalism with a closely related hypothesis, habit formation, and find that they have opposite effects on equilibrium asset returns and consumption inequality.

Pages: 65 pages
Date: 2021-01-02
New Economics Papers: this item is included in nep-dge and nep-hpe
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:cuf:wpaper:616

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