Status-seeking behavior, the evolution of income inequality, and growth Presented by Miyoung Oh 602Macro_ Spring2009
Jan 03, 2016
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.