PRELIMINARY DRAFT. PLEASE DO NOT QUOTE WITHOUT PERMISSION. Political Economic of Growth with a Preference for Status

This paper develops a positive theory of growth and redistribution in which agents care about both their absolute and relative levels of consumption. As in Alesina and Rodrik (1994), public goods are productive and are financed by a tax on capital. Equilibrium tax policy is chosen by a pivotal voter and is shown to reflect the strength of status preferences and the distributions of wealth and political power. The model indicates the existence of three types of societies, a status-oriented oligarchy, a plutocratic democracy and a proletarian democracy. In a statusoriented oligarchy, status concerns lead an economic and political elite to set the tax rate below the growth maximizing rate. In such a society, democratic reform increases growth and lowers income inequality. In a plutocratic democracy, the tax rate is above the growth maximizing level and the growth rate is increasing in the taste for status. In a proletarian democracy, increases in status preferences, democracy or wealth inequality lead to lower growth. These results suggest that status preferences interact with democracy and wealth inequality in a significant and nonlinear fashion to determine economic policy outcomes that influence growth and redistribution.