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GROWTH AND KEEPING UP WITH THE JONESES

Published online by Cambridge University Press:  23 July 2010

Ronald Wendner*
Affiliation:
University of Graz
*
Address correspondence to: Ronald Wendner, Department of Economics, University of Graz, Universitaetsstrasse 15, RESOWI-F4, A-8010 Graz, Austria; e-mail: ronald.wendner@uni-graz.at; URL: http://www.uni-graz.at/ronald.wendner.

Abstract

This paper investigates the impact of the desire to keep up with the Joneses (KUJ) on economic growth and optimal tax policy in a continuous-time, overlapping-generations model with AK technology and exogenous, gradual retirement. Due to the desire to KUJ, the propensity to consume out of total wealth rises (declines), and the balanced growth rate declines (increases), when the households' individual total (physical and human) wealth is increasing (decreasing) with age. The rate of retirement determines whether or not a household's total wealth is increasing with age. If total wealth is increasing (decreasing) with age, an optimal allocation is decentralized by an intergenerationally progressive (regressive) lump-sum tax system. The desire to KUJ strengthens the intergenerational regressivity (progressivity) of the optimal tax system. The optimal tax implications of the desire to KUJ are a key finding of this paper.

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Articles
Copyright
Copyright © Cambridge University Press 2010

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