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Dynamic Status Effects, Savings and Income Inequality

Research output: Contribution to journalArticle

Evangelos Dioikitopoulos, Stephen J. Turnovsky, Ronald Wendner

Original languageEnglish
Pages (from-to)351-382
Number of pages32
JournalINTERNATIONAL ECONOMIC REVIEW
Volume61
Issue number1
Early online date15 Oct 2019
DOIs
Publication statusPublished - 1 Feb 2020

King's Authors

Abstract

This article advances the hypothesis that the intensity of status preferences depends negatively on the average wealth of society (endogenous dynamic status effect), in accordance with empirical evidence. Our theory replicates the contradictory historical facts of an increasing saving rate along with declining returns to capital over time. By affecting the dynamics of the saving rate, the dynamic status effect raises inequality, thereby providing a behavioral mechanism for the observed diverse dynamics of income inequality across countries. In countries in which the dynamic status effect is strong (weak), inequality rises (declines) over time in response to a positive productivity shock.

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