Social Comparisons, Inequality, and Growth

In this paper we will study the interaction of inequality and growth when people are assumed to care about their relative standing. We show that an increase in a societies' concern for relative standing aggravates a negative impact of inequality on growth if two conditions are fulfilled: Individuals have a higher concern for their present than for their future relative standing and they have a tendency to find their reference groups among people who are wealthier than they are themselves. We present some empirical evidence that conforms to this line of explanantion.