[Back]

F.X. Hof, K. Prettner:
"The Quest for Status and R&D-based Growth";
Report for Vienna University of Technology, Working Papers in Economic Theory and Policy; Report No. 1, 2016; 59 pages.

We analyze the impact of status preferences on technological progress and long-run
economic growth. For this purpose, we extend the standard relative wealth approach
by allowing the two components of the representative household´s wealth, physical
capital and shares, to differ with respect to their status relevance. Relative wealth
preferences imply that the effective rate of return of saving in the form of a particular
asset is the sum of its market rate of return and its status-related extra return. It is
shown that the status relevance of shares is of crucial importance: First, an increase in
the intensity of the quest for status raises the steady-state economic growth rate only
if the status-related extra return of shares is strictly positive. Second, for any given
degree of status consciousness, the long-run economic growth rate depends positively
on the relative status relevance of shares. Third, while in the standard model the decentralized
long-run economic growth rate is less than its socially optimal counterpart,
the wealth externalities in our model counterbalance this distortion to some extent
provided that shares matter for status.

Status concerns, relative wealth, technological progress, long-run economic growth, social optimality.