Habits, Status Preferences, and Optimal Economic Growth

Abstract

Economic theorists have intensively focused on extending their workhorse models with endogenous technology and human capital accumulation in the recent decades. They have also attempted to build models with various types of heterogeneities and inequalities and with non-economic factors such as social norms and psychological foundations. In a strong sense, the mainstream economic theory has returned back to the classical themes of growth and inequality with a broader vision. In line with Thorstein Veblen's (1899) assessments on how human behavior is influenced by social forces, this thesis investigates the effects of status-seeking behavior and the formation of fertility habits on the cross-section distribution of wealth, the processes of physical and human capital accumulation, and the level of welfare in the long run. Chapter 1 introduces a discrete-time, overlapping generations (OLG) general equilibrium (GE) model with endogenous growth, status-seeking motive, and heterogeneity in preferences and asset endowments. The wealth distribution analysis focuses on the first two moments of the detrended wealth distribution. The basic reason for using the detrended distribution is that agents continue to accumulate wealth over time within the model dynamics, and the wealth stock goes to infinity. In competitive equilibrium, the steady-state variance of detrended wealth, if it exists, depends on the means and variances of preference parameters. Results also show that the status-seeking motive adversely affects the welfare levels of an endogenously determined fraction of agents. Extensions of the simple model have non-trivial implications regarding the sources of inequality, optimal levels of capital income taxes, and redistribution. Chapter 2 introduces a discrete-time, OLG GE model where habits (or social norms) constrain fertility decisions and affect human capital accumulation. The results show that, if adult agents are strictly conservative, i.e., if they do not question the existing social norms, the economy cannot escape the high-fertility underdevelopment trap that causes the economy to stagnate in the long run. Once the model is extended with secularization that leads to the weakening of religious norms, the economy converges to a balanced growth path where human capital grows perpetually, fertility declines to its replacement level, and the population of the economy is stabilized.