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The Spirit of Capitalism and Consumption Inequality

Author

Listed:
  • Yulei Luo

    (Faculty of Business and Economics, University of Hong Kong)

  • Jun Nie

    (Research Department, Federal Reserve Bank of Kansas City)

  • Heng-fu Zou

    (China Economics and Management Academy, Central University of Finance and Economics)

Abstract

In this paper we argue that Max Weber's (1904-05, German; 1958) theory on "spirit of capitalism" can be modeled via a direct preference for wealth. We incorporate the spirit of capitalism into a general equilibrium consumption-portfolio choice model to examine the effects on consumption inequality, equilibrium interest rate, and equity premium-an unexplored area in the literature. We provide closed-form solutions to help disentangle the effects of the spirit of capitalism in driving the key results. Quantitatively, we show that a small degree of the spirit of capitalism can improve the model's predictions in all three dimensions (consumption inequality, equilibrium interest rate, and equity premium) simultaneously. We show our results are robust to more general specifications on the income process and to incorporating macroeconomic rare disasters. Finally, we compare the spirit of capitalism with a closely related hypothesis, habit formation, and find that they have opposite effects on equilibrium asset returns and consumption inequality.

Suggested Citation

  • Yulei Luo & Jun Nie & Heng-fu Zou, 2021. "The Spirit of Capitalism and Consumption Inequality," CEMA Working Papers 616, China Economics and Management Academy, Central University of Finance and Economics.
    • Handle: RePEc:cuf:wpaper:616
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    References listed on IDEAS

    as
    1. Yulei Luo & Jun Nie & Eric R Young, 0. "Ambiguity, Low Risk-Free Rates and Consumption Inequality," Economic Journal, Royal Economic Society, vol. 130(632), pages 2649-2679.
    2. Robert J. Barro, 2009. "Rare Disasters, Asset Prices, and Welfare Costs," American Economic Review, American Economic Association, vol. 99(1), pages 243-264, March.
    3. Yulei Luo & Jun Nie & Eric R Young, 2020. "Ambiguity, Low Risk-Free Rates and Consumption Inequality," The Economic Journal, Royal Economic Society, vol. 130(632), pages 2649-2679.
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    Cited by:

    1. Yanzhao Liu & Liutang Gong & Jianjian Liu & Chan Wang, 2022. "Dynamic Efficiency in an OLG Model With the Spirit of Capitalism," Annals of Economics and Finance, Society for AEF, vol. 23(2), pages 315-328, November.
    2. Xindong Cheng & Yingjue Wang & Jinqiang Yang, 2021. "Entrepreneurial Spirit and Entrepreneurial Finance," Annals of Economics and Finance, Society for AEF, vol. 22(2), pages 367-388, November.

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