Political economy of growth with a taste for status

Abstract

This paper investigates the political economy of growth when individuals prefer high levels of relative consumption. A pivotal voter determines the equilibrium tax on capital, the revenues from which fund the provision of productive public goods. The taste for status and the distributions of wealth and political power interact to generate stylized versions of oligarchies, middle-class democracies and populist democracies. A rise in the taste for status increases the role of distributional concerns in policy preferences, lowering growth in an oligarchy or populist democracy, but increasing it in a middle-class democracy. In addition, the egalitarian redistribution of wealth or political power causes growth to first rise and then fall as the equilibrium tax rate approaches and then exceeds its growth-maximizing level, generating inverse U-shaped relationships between democracy and growth and inequality and growth.