Economic growth and status-seeking through personal wealth

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