Economic Growth with Social Status and Inequality

Chapter 11 is concerned with the economic consequences of conspicuous consumption and social status. According to Veblen, people are interested in pursuing conspicuous consumption as it signals wealth and social status. Duesenberry held that people may try to improve social status by imitating the consumption standard of the social or classes above them. The purpose of this chapter is to introduce social status into a growth economic theory with heterogeneous households. It is argued that people are concerned with social status because it serves as a signal of non-observable abilities. Introduction of social status makes traditional growth models more robust in explaining economic growth processes. It is concerned with social status and growth with inequalities in income and wealth. The way that social status is integrated into the growth model is influenced by the literature that studies the macroeconomic effects of consumers’ wealth-induced preferences for social status. In this literature social status is considered as functions of private wealth within neoclassical growth models. This chapter deals with social status within an integrated framework of the Walrasian general equilibrium and neoclassical growth theories. It develops the growth model of wealth and income distribution among heterogeneous households with endogenous social status and examines dynamic properties of the model and simulates the model with three groups. It also studies the effects of changes in group 1’s spirit of capitalism, the total productivity of the capital goods sector, group 1’s social status more strongly affecting its propensity to save, group 3’s population, the depreciation rate of physical capita, group 3’s human capital and the output elasticity of capital of the capital goods sector.