Keeping up with or running away from the Joneses: the Barro model revisited

This paper reexamines the Barro growth model in a context of individualpreferences with consumption externality. Agents care about both consumption and social status, which is determined by their relative consumption in society. The results underline the individuals' preferences for status as a key role in explaining long term growth and welfare. In particular, a higher growth rate may correspond to a lower social welfare if increment in growth is explained by status-seeking a companied by the keeping up with the Joneses. Furthermore, we discuss two public financing systems from the viewpoint of growth and welfare.If lump-sum tax always implies a higher growth rate, income tax may perform better in terms of welfare when government size becomes sufficiently large.