Abstract
In standard approaches to the political economy of inequality, the income distribution and the preferences of households are taken as fixed when studying how incomes are determined within and between nations. This paper makes the income distribution endogenous by supposing that aspirational parents can socialize children into having aspirational preferences which are modelled as a reference point in income space. The model looks at the endogenous determination of the level of income, income inequality and income redistribution where the proportion of aspirational individuals evolves endogenously according to pay-offs along the equilibrium path. The paper discusses implications of the model for intergenerational mobility. It also shows how the income generation process is critical for the dynamics and welfare conclusions. Finally, it looks at some evidence from the World Values Survey in light of the theory.
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