Working Paper BETA #2012-06

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Title : Status-seeking and economic growth: the Barro model revisited.

Author(s) : Thi Kim Cuong Pham

Abstract : This paper reexamines the Barro growth model taking into account status-seeking behavior. Agents care about both consumption and social status, which is determined by their relative consumption in society. Public capital as production input is financed by income tax or lumpsum tax. We discuss different measures to reach the optimal growth and optimal welfare in a decentralized economy and find that under some parameter conditions, there are some government sizes for which the decentralized growth is optimal, and this result does not require corrective taxation policy. We also find the superiority of income tax versus lump-sum tax from the point of view of optimal growth in a decentralized economy and of social welfare. Besides, we propose corrective tax programs with constant capital tax or subsidy and time-varying consumption tax that enable an economy to reach the first-best optimal growth. The extension to a congestion model modies somewhat the results. We discuss conditions under which the first-best or the secondbest optimal growth is attained in a decentralized economy.

Key-words : Corrective tax, endogenous growth, public expenditure, relative consumption, status-seeking.

JEL Classification : D90; H21; H50; O41