Relative consumption, relative wealth and growth Frederic Tournemaine a, ⁎ , Christopher Tsoukis b a School of Economics, University of Chicago-UTCC Research Center, University of the Thai Chamber of Commerce, 126/1 Vibhavadee-Rangsit Road, Dindaeng, Bangkok, 10400, Thailand b Department of Economics, London Metropolitan University, 84 Moorgate, London EC2M 6SQ, UK Received 6 March 2007; received in revised form 16 January 2008; accepted 13 February 2008 Available online 19 February 2008 Abstract In a growth model where individuals care about their social status measured both by consumption and wealth comparisons, we show that status comparison in wealth heightens economic growth, while status comparison in consumption may affect negatively economic growth. © 2008 Elsevier B.V. All rights reserved. Keywords: Social aspirations; Relative consumption; Relative wealth; Growth JEL classification: D2; E9; O41 1. Introduction The idea that individuals derive utility not only from their level of consumption but also from their relative position in society is by now well established. Among the issues inves- tigated in the literature is the impact of such social comparisons relations on economic growth. Yet, there is little agreement on the nature of such social comparisons. Corneo and Jeanne (1997), Futagami and Shibata (1998), Pham (2005) define social status as an individual's level of wealth relative to that of the others. They show that seeking greater social status provides incentives to perform growth-enhancing activities. In contrast, Rauscher (1997), Fisher and Hof (2000), Alonso-Carrera et al. (2004), Alvarez-Cuadrado et al. (2004), Tsoukis (2007), define social status as the ratio of an individual's level of consumption to the average level of consumption of the others. The general result is that greater social aspirations in consumption affect the dynamics, but not the steady-state outcome of a decentralized economy. However, this result is overturned if one postulates endogenous labour supply. In this case, status motives give incentives to individuals to work more which raises the marginal product of capital and the growth rates. Yet, the point remains that there is little dialogue between these two strands of for- malizing social comparisons. In this paper, we aim to fill this gap, by embedding both definitions of social status into our framework. There are two reasons for doing so: The question of which type of comparison should be preferred is an open one. Second, we cast their interpretation in terms of individuals' intertemporal preferences. Wealth- and consumption-based comparisons affect the trade- off between current and future consumption. We show that such intertemporal preferences have important consequences for growth, welfare, and for the important issue of whether what may be called the “natural equilibrium rate of growth” is above or below the optimal one. 2. Model We develop a basic endogenous growth model in the spirit of Romer (1986). There is a representative firm which produces an output, y t , that can be consumed, c t , or invested to produce new units of capital, k t . At each moment t, t ∈ [0,+ ∞), output is produced with the technology y t ¼ Ak t ð Þ a B t l t ð Þ 1a ; ð1Þ Available online at www.sciencedirect.com Economics Letters 100 (2008) 314 – 316 www.elsevier.com/locate/econbase ⁎ Corresponding author. Tel.: +66 2697 6632; fax: +66 2692 3168. E-mail address: frederic.tournemaine@uc-utcc.org (F. Tournemaine). 0165-1765/$ - see front matter © 2008 Elsevier B.V. All rights reserved. doi:10.1016/j.econlet.2008.02.018