Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/300018 
Year of Publication: 
2024
Series/Report no.: 
CESifo Working Paper No. 11090
Publisher: 
CESifo GmbH, Munich
Abstract: 
We take into account that envy (relative consumption concerns) is more pronounced in the present than in the future. We consider a Ramsey-type model in which agents differ only in their initial capital endowments but are identical in their exogenous parameters. Agents' preferences exhibit present-biased envy: agents are naive and care about how their consumption levels compare to that of others in the current period. Our results suggest that present-biased envy affects both the level of inequality and the income level in an economy. First, present-biased envy generates the Matthew effect (the relatively rich get richer while the relatively poor get poorer), leading to a highly unequal long-run distribution of wealth. After some finite time, only those agents who were the wealthiest from the outset own the entire capital stock. All other agents are in the maximum borrowing state and spend their wages to repay the debt. Second, present-biased envy makes agents effectively more impatient, lowering the long-run capital stock and the aggregate income level compared to those in an economy without envy.
Subjects: 
relative consumption
envy
time inconsistency
sliding equilibrium
perfect foresight
wealth distribution
JEL: 
D15
D31
D50
D91
O40
Document Type: 
Working Paper
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