Social inclusion and the emergence of development traps

This paper argues that individuals concerns for relative position contribute to the emergence of development traps. It demonstrates that changes in the mean and the distribution of income qualitatively modify individual’s reference group by affecting the magnitude of the reference standard. Over time, this effect influences the dynamical transition of within dynasties incomes and drives the emergence of development traps. In particular, an increase in mean income and a reduction of inequality cause an increase in the reference standard, inducing, in the long-run, the transition from a Solovian-type stage to a development traps regime as agents need to sacrifice relatively more resources in order to keep up with the reference group.