Non-Monotonic Welfare Dynamics in a Model of Sustained Income Growth

In an overlapping generations economy with endogenous income growth, I combine themes from the work of Cooper et al. (2001), Kapur (2005), and Eaton and Eswaran (2009) in order to provide an example of an economy whose welfare dynamics are non-monotonic. Particularly, the evolution of workers’ welfare can be distinguished between two different regimes that arise naturally during the process of economic development. At relatively early stages, status concerns are inactive and welfare increases following the rising consumption of normal goods. During the later stages, however, workers engage in some type of status competition that does not allow consumption to improve well-being: their welfare actually declines as successive generations of workers increase their labour effort at the expense of leisure.