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Aspirations, Health and the Cost of Inequality

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  • Allen, Jeffrey
  • Chakraborty, Shankha
Abstract
How does inequality motivate people and at what cost? We develop a model of perpetual youth with heterogeneous upward-looking aspirations -- people value their consumption relative to the conditional mean of those above them in the distribution. Their survival depends on health capital produced from time investment and health goods. Higher fundamental inequality, working through the aspirations gap, motivates people to work and save more. Economic outcomes improve but income and consumption inequality worsen because the poor have less capacity to respond. By diverting resources from health production, aspirations also worsen mortality, especially for the poor. Though relative income has a strong negative effect on personal health, we show that inequality has a weaker effect on population health, explaining an empirical puzzle on the relative income and health gradient.

Suggested Citation

  • Allen, Jeffrey & Chakraborty, Shankha, 2015. "Aspirations, Health and the Cost of Inequality," MPRA Paper 64087, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:64087
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    References listed on IDEAS

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    Cited by:

    1. Barnett, Richard C. & Bhattacharya, Joydeep & Bunzel, Helle, 2019. "The fight-or-flight response to the Joneses and inequality," Journal of Economic Dynamics and Control, Elsevier, vol. 101(C), pages 187-210.
    2. Barnett, Richard C. & Bhattacharya, Joydeep & Bunzel, Helle, 2018. "The Fight-or-Flight Response to the Joneses and Income Inequality," ISU General Staff Papers 201812120800001060, Iowa State University, Department of Economics.
    3. Caballé, Jordi & Moro-Egido, Ana I., 2021. "Do aspirations reduce differences in wealth accumulation?," Economic Modelling, Elsevier, vol. 102(C).
    4. Atolia, Manoj & Papageorgiou, Chris & Turnovsky, Stephen J., 2021. "Re-opening after the lockdown: Long-run aggregate and distributional consequences of COVID-19," Journal of Mathematical Economics, Elsevier, vol. 93(C).
    5. Aksan, Anna-Maria & Chakraborty, Shankha, 2023. "Life expectancy across countries: Convergence, divergence and fluctuations," World Development, Elsevier, vol. 168(C).
    6. Allen, Jeffrey & Chakraborty, Shankha, 2022. "Inequality and the Ability to Aspire," Journal of Economic Behavior & Organization, Elsevier, vol. 203(C), pages 264-283.

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    More about this item

    Keywords

    Inequality; Aspirations; Consumption externality; Health; Grossman model; Relative income and health gradient; Heterogeneous agents;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • I14 - Health, Education, and Welfare - - Health - - - Health and Inequality
    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General

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