Social inclusion through social status and the emergence of development traps

This paper investigates the long‐run implications of concerns for status when heterogeneous agents care about their relative consumption with respect to an endogenous benchmark consumption of their reference group. Agents endogenously choose whether to enter the rat race to consume the benchmark level of a social participation, status, good to gain access to socially advantaged and privileged groups because relative consumption determines agents’ relative position in society which is ultimately instrumental in the accumulation of wealth and absolute consumption. The dynamical analysis predicts that increases in mean incomes and reductions in inequality over the long‐run process of development foster the competition for status, raise the cost of access to the reference group and drive the onset of multiple stable steady‐state equilibria. This mechanism governs the endogenous transition from a Solovian‐type stage to a development traps equilibrium at which the poorest dynasties are excluded from the reference group and trapped in a low‐income stable equilibrium while the richest dynasties strive to differentiate themselves from the poorest ones to reap the economic benefits of the elite position in society.