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.