Discussion Paper

No. 2018-12 | January 29, 2018
Income inequality and saving in a class society: the role of ordinal status
(Published in Special Issue The economics of social status)

Abstract

This paper examines the impact of income growth and income inequality on household saving rates and payoffs in a non-cooperative game where each player's payoff depends on her present and future consumption and her rank in the present-consumption distribution. The setting is a pooling equilibrium with three clusters of successive income groups, each cluster having its own present-consumption standard and rank in the present-consumption distribution. In this way the analysis addresses the saving behaviour and welfare of three social classes: the lower, middle and upper class. The author finds explanations for the Easterlin paradox and the Kuznets consumption puzzle and concludes that rank concerns tend to weaken the standard effect of inequality on aggregate saving.

JEL Classification:

C72, D31, D62, E21, I31, Z10

Assessment

  • Downloads: 232

Links

Cite As

Rein Haagsma (2018). Income inequality and saving in a class society: the role of ordinal status. Economics Discussion Papers, No 2018-12, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2018-12


Comments and Questions


Gerasimos Soldatos - article review
January 30, 2018 - 08:49

This is an interesting and nice analytically paper with an appealing interpretation of the Easterlin paradox and the Kuznets consumption puzzle. The conclusion at p. 12 that: “...the lowest payoff growth rate occurs in the lowest income group. Payoff growth rates at the bottom of the social class are ...[more]

... even zero or negative...” is a remarkable one because it captures the fact that most people of low socioeconomic status are not in a position to pursue a higher status is. The author might mention this in a footnote. Moreover, note that since present consumption for these people is a necessity, and since at p. 13: “...the aggregate saving rate increases or decreases, depending on whether the trendsetting income groups see present consumption as a necessity or luxury” and “...saving rates are increasing in income for... the majority of consumers”, it follows that most people are of low socioeconomic status. “Low”, in the sense more or less of Stigliz (2013), and this in turn implies that the paper offers in addition a formal modeling of Stigliz’s arguments against those of Krugman (2013). The author might want to say something about it although the paper deserves merit as it stands.

References

Krugman, P. (2013). Inequality and recovery. The New York Times, January 20. Retrieved from https://krugman.blogs.nytimes.com/2013/01/20/inequality-and-recovery/

Stiglitz, J.E. (2013). Inequality is holding back the recovery, The New York Times, January 19. Retrieved from https://opinionator.blogs.nytimes.com/2013/01/19/inequality-is-holding-back-the-recovery/


Anonymous - reply
March 09, 2018 - 09:48

Thanks for your comments. Stiglitz worries that more income inequality would increase the aggregate personal saving rate and create long-run underconsumption problems. However, while income inequality has increased in the US since the 1980s, the aggregate personal saving rate and also the gross private saving rate (which includes gross business ...[more]

... saving) did not rise but fall, with only an interruption for a few years following the 2008 financial crisis (see Fig 1 in Alvarez-Cuadrado et al. (2012) and the figure in Krugman’s blog) -- which is Krugman’s objection. If the marginal propensity to save is strictly increasing in income, as found in US cross-section data, more inequality must raise the aggregate personal saving rate. That the opposite happened might be because more inequality tends to increase peer pressures on consumption (in particular, raising consumption standards for a large lower class) and thus discourage saving (see Section 6). I might dwell a bit more on this point in Section 6.


Anonymous - Referee Report 1
March 15, 2018 - 14:19

See attached file


Anonymous - Referee Report 2
March 15, 2018 - 14:20

See attached file


Rein Haagsma - Replies to Referee Reports 1 + 2
April 10, 2018 - 15:53

See attached file