Working Paper BETA #2004-11

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Title : Wealth distribution, endogenous fiscal policy and growth: status-seeking implications.

Author(s) : Thi Kim Cuong PHAM

Abstract : We investigate the wealth distribution and endogenous fiscal policy in a two-classes growth model in which individuals exhibit a desire for social status. The latter is in- creasing with individual wealth and decreasing with the average level of the society. First, we show that status seeking is crucial in determining the long-run wealth dis- tribution: agents with stronger status motive end up holding a higher level of wealth. Second, a higher inequality can be associated with a higher growth if it is due to a stronger incentive to accumulate wealth of one class of agents. Third, the model implies that a higher growth rate may reduce welfare of one class of agents and raise welfare of the other one. Finally, when fiscal policy is determined through a voting mechanism, an increase in the strength of status motive of majoritarian class may lead to a reduced political equilibrium growth.

Key-words : Individual welfare; endogenous growth; endogenous Þscal policy; status seeking; wealth distribution

JEL Classification : D31; H31; H50; O41