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Aspirations and Inequality

  • Garance Genicot
  • Debraj Ray

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.N. & Johnson, P.A., 1994. "Multiple Regimes and Cross-Country Growth Behavior," Working papers 9419, Wisconsin Madison - Social Systems.
  2. Eliana La Ferrara & Alberto Chong & Suzanne Duryea, 2008. "Soap Operas and Fertility: Evidence from Brazil," Research Department Publications 4573, Inter-American Development Bank, Research Department.
  3. Macours, Karen & Vakis, Renos, 2009. "Changing households'investments and aspirations through social interactions : evidence from a randomized transfer program," Policy Research Working Paper Series 5137, The World Bank.
  4. 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, vol. 29(2), pages 415-430, 05.
  5. SHALEV, Jonathan, . "Loss aversion equilibrium," CORE Discussion Papers RP -1456, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  6. Robert Jensen & Emily Oster, 2007. "The Power of TV: Cable Television and Women's Status in India," NBER Working Papers 13305, National Bureau of Economic Research, Inc.
  7. Clark, Andrew E. & Oswald, Andrew J., 1994. "Satisfaction and comparison income," CEPREMAP Working Papers (Couverture Orange) 9408, CEPREMAP.
  8. Dalton, P.S. & Ghosal, S. & Mani, A., 2011. "Poverty and Aspirations Failure," Discussion Paper 2011-124, Tilburg University, Center for Economic Research.
  9. David DE LA CROIX & Philippe MICHEL, 2001. "Altruism and Self-Restraint," Annales d'Economie et de Statistique, ENSAE, issue 63-64, pages 233-259.
  10. Galor, Oded & Zeira, Joseph, 1993. "Income Distribution and Macroeconomics," Review of Economic Studies, Wiley Blackwell, vol. 60(1), pages 35-52, January.
  11. 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, vol. 56(1), pages 102-122, 03.
  12. Freeman, Scott, 1996. "Equilibrium Income Inequality among Identical Agents," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 1047-64, October.
  13. Jaime Alonso-Carrera & Jordi Caballé & Xavier Raurich, 2007. "Aspirations, Habit Formation, and Bequest Motive," Economic Journal, Royal Economic Society, vol. 117(520), pages 813-836, 04.
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