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Positional preferences and efficient capital accumulation when households exhibit a preference for wealth

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  • Sugata Ghosh
  • Ronald Wendner

Abstract

We study the impact of positional preferences—with respect to wealth in addition to consumption—on endogenous growth, welfare, and corrective taxation. We consider first an AK model, and then introduce public capital. Labour supply is exogenous. We find analytically that the presence of wealth positionality always causes distortions (although a preference for absolute wealth by itself is non-distortionary). Consumption positionality introduces a distortion only if wealth is an argument in the utility function and the marginal degree of positionality in wealth does not match that of consumption. Two corrective tax instruments, a consumption or an income tax, are required for internalization of externalities in an AK set-up; the optimal choice of public investment is an additional instrument when public capital is introduced. Numerical simulations—pointing towards high corrective tax rates and their strong impact on growth and welfare—complement the theoretical analysis.

Suggested Citation

  • Sugata Ghosh & Ronald Wendner, 2018. "Positional preferences and efficient capital accumulation when households exhibit a preference for wealth," Oxford Economic Papers, Oxford University Press, vol. 70(1), pages 114-140.
    • Handle: RePEc:oup:oxecpp:v:70:y:2018:i:1:p:114-140.
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    File URL: http://hdl.handle.net/10.1093/oep/gpx027
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    Cited by:

    1. Thomas Aronsson & Sugata Ghosh & Ronald Wendner, 2023. "Positional preferences and efficiency in a dynamic economy," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 61(2), pages 311-337, August.
    2. Hof, Franz X. & Prettner, Klaus, 2019. "Relative consumption, relative wealth, and long-run growth: When and why is the standard analysis prone to erroneous conclusions?," Hohenheim Discussion Papers in Business, Economics and Social Sciences 12-2019, University of Hohenheim, Faculty of Business, Economics and Social Sciences.

    More about this item

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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