Inequality and the Ability to Aspire

Households with ex ante identical preference and ability but heterogeneous wealth decide whether or not to aspire to a common benchmark. The choice depends on the tradeoff between higher utility from wealth accumulation and lower utility from falling short. People choose to be aspirational if they are wealthy enough. This creates a tendency for polarization of aspirations and wealth. Demographic change counteracts it. As the relationship between fertility and household income goes from positive to negative, the non-aspirational poor procreate at a faster rate which, through the aspirational benchmark, brings aspirations within their reach. Not everyone aspires in the long run and wealth and lifetime utility gaps persist if the response to aspirations is strong.