Positional preferences and efficient capital accumulation when households exhibit a preference for wealth

Abstract

We study the impact of positional preferences—with respect to wealth in addition to consumption—on endogenous growth, welfare, and corrective taxation. We consider first an AK model, and then introduce public capital. Labour supply is exogenous. We find analytically that the presence of wealth positionality always causes distortions (although a preference for absolute wealth by itself is non-distortionary). Consumption positionality introduces a distortion only if wealth is an argument in the utility function and the marginal degree of positionality in wealth does not match that of consumption. Two corrective tax instruments, a consumption or an income tax, are required for internalization of externalities in an AK set-up; the optimal choice of public investment is an additional instrument when public capital is introduced. Numerical simulations—pointing towards high corrective tax rates and their strong impact on growth and welfare—complement the theoretical analysis.