Working Paper: NBER ID: w19976
Authors: Garance Genicot; Debraj Ray
Abstract: This paper develops a theory of socially determined aspirations, and the interaction of those aspirations with growth and inequality. The interaction is bidirectional: economy-wide outcomes determine individual aspirations, which in turn determine investment incentives and social outcomes. Thus aspirations, income and the distribution of income evolve jointly. When capital stocks lie in some compact set, steady states distributions must exhibit inequality and are typically clustered around local poles. When sustained growth is possible, initial histories matter. Either there is convergence to an equal distribution (with growth) or there is perennial relative divergence across clusters, with within-cluster convergence. A central feature that drives these results 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.
Keywords: aspirations; reference points; inequality; income distribution
JEL Codes: D9; J62; O15; O40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| individual aspirations (I31) | investment incentives (O31) |
| investment incentives (O31) | social outcomes (I14) |
| Economy-wide outcomes (E29) | individual aspirations (I31) |
| aspirations (Y60) | income distribution (D31) |
| initial income distribution conditions (D39) | convergence to equality (F62) |
| initial income distribution conditions (D39) | divergence into clusters of income inequality (D31) |
| aspirations (Y60) | investment behavior within income clusters (G11) |