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Aspirations and Inequality

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  • Garance Genicot
  • Debraj Ray

Abstract

This paper develops a theory in which society-wide economic outcomes shape individual aspirations, which affect the investment incentives of individuals. Through its impact on investments, aspirations in turn affect ambient social outcomes. We explore this two-way link. A central feature is that aspirations that are moderately above an individual’s current standard of living tend to encourage investment, while still higher aspirations may lead to frustration and lower investment. When integrated with the feedback effect from investment, we are led to a theory in which aspirations and income evolve jointly, and the social determinants of preferences play an important role. We examine conditions under which growth is compatible with long-run equality in the distribution of income. More generally, we describe steady state income distributions, which are typically clustered around local poles. Finally, the theory has predictions for the growth rates along the cross-section of income. We use these predictions to calibrate the model so that it fits growth data by income percentile for 43 countries, and back out the implicit aspirations-formation process that underlies these observations.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19976.

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Date of creation: Mar 2014
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Handle: RePEc:nbr:nberwo:19976

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  1. Durlauf, S.M. & Johnson, P.A., 1995. "Multiple Regimes and Cross-Country Growth Behavior," Working papers, Wisconsin Madison - Social Systems 9419r, Wisconsin Madison - Social Systems.
  2. Galor, Oded & Zeira, Joseph, 1993. "Income Distribution and Macroeconomics," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 60(1), pages 35-52, January.
  3. Chong, Alberto & Duryea, Suzanne & La Ferrara, Eliana, 2008. "Soap Operas and Fertility: Evidence from Brazil," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6785, C.E.P.R. Discussion Papers.
  4. Andrew E. Clark and Andrew J. Oswald, . "Satisfaction and Comparison Income," Economics Discussion Papers, University of Essex, Department of Economics 419, University of Essex, Department of Economics.
  5. Jaime Alonso-Carrera & Jordi Caballé & Xavier Raurich, 2004. "Aspirations, Habit Formation, and Bequest Motive," UFAE and IAE Working Papers, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) 641.04, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  6. Maria Grazia Pittau & Roberto Zelli & Paul A. Johnson, 2010. "Mixture Models, Convergence Clubs, And Polarization," Review of Income and Wealth, International Association for Research in Income and Wealth, International Association for Research in Income and Wealth, vol. 56(1), pages 102-122, 03.
  7. Dalton, P.S. & Ghosal, S. & Mani, A., 2011. "Poverty and Aspirations Failure," Discussion Paper, Tilburg University, Center for Economic Research 2011-124, Tilburg University, Center for Economic Research.
  8. SHALEV, Jonathan, . "Loss aversion equilibrium," CORE Discussion Papers RP, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) -1456, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  9. Maria Grazia Pittau & Roberto Zelli, 2004. "Testing for changing shapes of income distribution: Italian evidence in the 1990s from kernel density estimates," Empirical Economics, Springer, Springer, vol. 29(2), pages 415-430, 05.
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Cited by:
  1. Chiapa, Carlos & Garrido, José Luis & Prina, Silvia, 2012. "The effect of social programs and exposure to professionals on the educational aspirations of the poor," Economics of Education Review, Elsevier, Elsevier, vol. 31(5), pages 778-798.
  2. Modalsli, Jørgen Heibø, 2011. "Polarization, Risk and Welfare in General Equilibrium," Memorandum, Oslo University, Department of Economics 27/2011, Oslo University, Department of Economics.
  3. Ilyana Kuziemko & Ryan W. Buell & Taly Reich & Michael I. Norton, 2011. ""Last-place Aversion": Evidence and Redistributive Implications," NBER Working Papers 17234, National Bureau of Economic Research, Inc.
  4. Melissa S. Kearney & Phillip B. Levine, 2014. "Income Inequality, Social Mobility, and the Decision to Drop Out of High School," NBER Working Papers 20195, National Bureau of Economic Research, Inc.

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