Growth and distribution in models with endogenous impatience

This paper combines two strands of the literature on inequality and distribution issues: the classical approach, which insists on the division of society into classes characterized by different saving propensities, and the social conflict approach, which considers that inequality inflicts direct and indirect costs to economic development. Along the paper two simple models are studied: an exogenous and an endogenous growth model. In these two models, we assume that each consumer’s subjective discount factor is determined endogenously and depends on economic inequality through the following two channels. On the one hand, it is positively related to the individual consumer’s relative wealth. On the other hand, it is negatively affected by a simple aggregate measure of social conflict. We show that, unlike models with exogenously given discount rates, steady state equilibria in our two models are indeterminate and that the set of all equilibria is a continuum which can be parameterized by a simple index of income inequality. Economic development, proxied by national output or by the growth rate, is ambiguously related to the inequality index. However, under some reasonable assumptions, the dependence of economic development on this index has an inverted U-shaped form.