Socio-Behavioural Traits and Inequality

This chapter explores the implications of socio-behavioural macroeconomic models for distribution, inequality, and related issues. To frame our discussion, we first present key facts about inequality that present challenges to standard models. A line of argument around the “capitalist spirit”, that individuals aim to maximise capital per se over time, holds a promise to explain a saving-income ratio that rises with capital. In addition to relevant results from Chapter 5 on the effect of hyperbolic discounting on distribution, we discuss why present bias (so far assumed common across individuals) may, in fact, be adversely correlated with one’s position in the distribution; hence, poorer (richer) individuals may see their income grow more slowly (faster). Furthermore, we delve into the debate surrounding the potential trade-off between long-term growth and distribution. We review the literature on social comparisons and their impact on this relationship, considering both one-sector and two-sector growth models with status and human capital. In the context of the latter, the notion of “status jobs” is explored and the choice of the educational regime (public versus private) is analysed under the light of the status motive. Finally, we illustrate formally the issues around “shadow education”. We develop an endogenous growth model with human capital accumulation where individuals, differentiated by their status motivation, receive compulsory education and decide whether or not to invest in extra schooling activities. We show that government spending on education is growth-enhancing and has an ambiguous impact on inequality. In tackling political-economy issues, we show that the more motivated individuals prefer a greater size of the public education sector than the less motivated ones. Therefore, welfare-wise, the chosen size of the government can be either too high or too low.