Econometrica: Mar 2017, Volume 85, Issue 2

Aspirations and Inequality

https://doi.org/10.3982/ECTA13865
p. 489-519

Garance Genicot, Debraj Ray

This paper develops a theory of socially determined , and the interaction of those aspirations with growth and inequality. The interaction is bidirectional: economy‐wide outcomes determine individual aspirations, which in turn determine investment incentives and social outcomes. Thus aspirations, income, and the of income evolve jointly. When capital stocks lie in some compact set, steady state distributions must exhibit inequality and are typically clustered around local poles. When sustained growth is possible, initial histories matter. Either there is convergence to an equal distribution (with growth) or there is perennial relative divergence across clusters, with within‐cluster convergence. A central feature that drives these results is that aspirations that are moderately above an individual's current standard of living tend to encourage investment, while still higher aspirations may lead to frustration.

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Supplemental Material

Supplement to "Aspirations and Inequality"

This Appendix provides supplementary material to accompany the main text. Appendix A concerns stationary and steady states in the model with bounded income. It characterizes stationary states for the model with bounded income. It shows by example that stationary states may not always exist and proves the existence of the weaker notion of a steady state. It contains an extension to technological progress in the model with bounded income. Appendix B provides some comparative statics results in the constant elasticity growth model. Appendix C proves Observations 2 and 3 of Section 5.4.1 in the main text. It discusses minimal monotonicity and shows that upward mean aspirations satisfy this property.

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