Dynamic Status Effects, Savings, and Income Inequality
Evangelos Dioikitopoulos (),
Stephen J Turnovsky () and
Ron Wendner ()
No 2017-08, Graz Economics Papers from University of Graz, Department of Economics
This paper advances the hypothesis that the intensity of status preferences depends negatively on the average wealth of society (endogenous dynamic status effect), in accordance with empirical evidence. Our behavioral driven theory is able to replicate the contradictory historical facts of an increasing saving rate along with declining returns on capital over time. As an implication of our hypothesis, we are able to provide a theoretical foundation for the observed dynamics on comparative development of income inequality across different countries. In particular, our theory implies that, as an economy develops, the saving rate increases during transition altering the speed of convergence relative to the standard neoclassical growth model. The initially lower and then increasing saving rate during the process of development benefits the wealthy households relative to poor ones, as the rate of interest on capital declines at a lower rate. Therefore, the endogenous dynamic status effect contributes to a rise in wealth inequality. Along the same lines, we analyze the behavior of inequality in response to changes in wealth (income) induced by productivity shocks. Under a positive productivity shock, in economies with a strong enough endogenous dynamic status effect, inequality increases - a fact that we experience in many countries around the globe.
Keywords: Status preferences; Saving rate; Growth; Inequality (search for similar items in EconPapers)
JEL-codes: D11 D31 O11 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-gro and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed
Downloads: (external link)
Working Paper: Dynamic Status Effects, Savings, and Income Inequality (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:grz:wpaper:2017-08
Ordering information: This working paper can be ordered from
Access Statistics for this paper
More papers in Graz Economics Papers from University of Graz, Department of Economics University of Graz, Universitaetsstr. 15/F4, 8010 Graz, Austria. Contact information at EDIRC.
Bibliographic data for series maintained by Michael Scholz ().