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Contribution Details

Type Working Paper
Scope Discipline-based scholarship
Title Social Comparisons, Inequality, and Growth
Organization Unit
  • Markus Knell
  • English
Institution University of Zurich
Series Name Working paper series / Institute for Empirical Research in Economics
Number No. 5
ISSN 1424-0459
Date 1999
Abstract Text Over the recent years one could repeatedly hear the claim that a rising concern for relative standing (in terms of consumption) was partly responsible for the decline in household savings and in growth that could be observed in some developed countries (particularly in the US) and that the rise in income inequality had further aggravated this process. In this paper we want to analyze under which conditions (concerning the importance of social comparisons for peoples' behavior and their choice of reference groups) this claim is valid. We show that an increase in a societies' concern for relative standing aggravates a negative impact of inequality on growth if two conditions are fulfilled: individuals have a higher concern for their present than for their future relative standing and individuals have a tendency to find their reference groups among people that are wealthier then they are themselves. Empirical data suggest that the negative impact of inequality on growth is stronger in highly developed economies. This is compatible with the explanation that is presented in this paper if individuals living in highly developed countries are more likely to have a high concern for relative standing. We will argue (using research on the cultural consequences of economic development) that this is a reasonable assumption to make.
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