Status Aspirations, Wealth Inequality, and Economic Growth

• Author: Oded Stark
• Published date: 01 February 2006
• Date: 01 February 2006
• DOI: http://doi.org/10.1111/j.1467-9361.2005.00309.x

Status Aspirations, Wealth Inequality, and

Economic Growth

Oded Stark*

Abstract

This paper argues that an increase in the inequality of wealth prompts a stronger quest for status that in

turn fosters the accumulation of wealth. It proposes a measure for an individual’s want of social status.For

a given level of a population’s wealth, the corresponding aggregate measure of want of social status is shown

to be positively related to the Gini coefficient of wealth inequality. Hence, the Gini coefficient and growth

are positively correlated, holding the population’s wealth constant.

The relationship between inequality in the distribution of wealth and growth is not

akin to the causal direct links between technological advancement and growth, or

between per worker capital and growth. Thus, there is an understandable need to

identify an intervening variable and lay out the associated chain of interactions. This

demand has recently been met by several creative suppliers. Zweimüller (2000) intro-

duces the incentive to innovate and the demand for innovation as the intervening vari-

able between wealth inequality and growth. With a hierarchy of wants and wealth

concentrated in the hands of a small group of wealthy people, only the members of

this group buy the product of the most recent innovator. Consequently, the market for

his product is small. A redistribution from the wealthy to the poor that would leave

the wealthy rich enough to continue buying the product, but at the same time enable

the poor to buy the product, would facilitate a faster increase in the size of the market

for the product, increase the profitability of innovations,and foster growth. To Fishman

and Simhon (2002) the intervening variable of choice is the division of labor. When

increased specialization requires the investment of real resources, borrowing is con-

strained and capital markets are incomplete, individuals who command little wealth

may not be able to invest in specialization. Hence, economies with a highly unequal

distribution of wealth may not be able to achieve a division of labor that is conducive

to growth. Perhaps the most intriguing of the recent forays is that of Corneo and Jeanne

(2001) who single out the quest for social status as the intervening variable between

wealth inequality and growth. Succinctly put, their argument is as follows:“By increas-

ing the dispersion of wealth levels, more inequality discourages those who are

relatively poor from catching up with the rich in the contest for social status. In turn,

this weakens the incentives for the relatively rich to accumulate wealth in order to

defend their social status.As a consequence, the status motive inducing people to accu-

mulate wealth is weaker for everyone under a more unequal distribution of wealth.

The resulting rate at which aggregate wealth is accumulated is, therefore, slower” (p.

284). The purpose of this paper is to suggest an appealing and alternative measure of

social status and to show that the incorporation of this measure might give rise to an

outcome that is the opposite of the result eloquently derived by Corneo and Jeanne.

Review of Development Economics, 10(1), 171–176, 2006

*Stark: Universities of Bonn, Klagenfurt, and Vienna; Warsaw University; ESCE Economic and Social

Research Center, Cologne and Eisenstadt. E-mail: ostark@uni-bonn.de. Partial financial support from the

Humboldt Foundation and the Sohmen Foundation is gratefully acknowledged.

© 2006 The Author

Journal compilation © 2006 Blackwell Publishing Ltd,9600 Garsington Road, Oxford, OX4 2DQ,UK and 350 Main St, Malden,MA, 02148, USA