Behavioral Growth Theory: A Neoclassical Approach

How do material norms and aspirations on which individual judgments of well-being are based affect the growth dynamics of an economy? Do economies that weigh very highly of these norms grow differently from those economies that values these norms differently? This paper attempts to answer these questions by building a growth model, where individual not only care for its consumption but also evaluates its consumption with its perceived level of ideal consumption. We show that it is best for the economy that individuals ignore material aspirations when the economy is growing, whereas they should highly care about their material aspiration when the economy is depleting. We also show that role of individual’s outlook is underestimated in contemporary growth theories.