Status, endogenous reference standards, and the growth-inequality relation: A note

Abstract

We develop an endogenous growth model with heterogeneous agents who care about their status in society. Following the social psychology literature, we formalise the idea that the reference standard to which people compare themselves is a choice variable. In such a framework, we analyse the determinants of the choice of the reference standard and their effects on growth and distribution. We show that low skilled individuals can end up with a higher level of income than high skilled individuals if their level of ambition is high enough. This is because what matters for the choice of reference standard and inequality is the combination of skills and ambitions of individuals. Moreover, as skills and ambitions affect positively growth, we find that growth and inequalities can be either negatively or positively correlated