Consumption externalities, elastic labor supply and wealth distribution

Abstract

This study employs a neoclassical growth model to investigate the impact of consumption externalities on the distribution of wealth. It also jointly accounts for heterogeneity in the degree of consumption externalities, heterogeneity in the initial wealth endowments, and endogenous labor supply. First, we demonstrate that catching-up occurs when an initially poorer household works more than an initially wealthier one, after which the additional income acquired through hard work offsets the initial wealth difference. Second, a reduction in wealth inequality is only consistent and systematic if an initially wealthier household works relatively less than the social average. When this condition is not met, a reduction in wealth inequality only occurs if the initial wealth is highly and unevenly distributed.