Wealth inequality under “keeping up with the Joneses” preferences

- I construct a version of the Aiyagari (1994) model.
- I assume “Keeping up with the Joneses” utility function.
- Reference consumption defined by consumption of next higher earning group.
- Wealth inequality is substantially magnified under these preferences.
- High persistence of earnings is needed to obtain this result.

In the present paper I introduce “keeping up with the Joneses preferences” in an otherwise standard heterogeneous agent economy. The model simulations show that this kind of preferences can generate a substantial increase in wealth inequality compared to an equal model with standard expected utility.