Public debt, positional concerns, and wealth inequality

Author(s)
Kirill Borissov, Andrei Kalk
Abstract

We consider an AK growth model with positional concerns and public debt financed by distortionary income taxes. We show that if positional concerns are not too strong, there is a threshold level of the debt-to-GDP ratio. For the debt-to-GDP ratio below this level, the economy converges to a unique egalitarian balanced-growth equilibrium, whereas if this ratio is above the threshold level, the economy eventually settles on a two-class balanced-growth equilibrium. The rate of growth in the egalitarian equilibrium is higher than that in any possible two-class equilibrium. Thus, a reduction in public debt may cause the economy to switch from the two-class regime to the egalitarian regime and accelerate growth. Our results also suggest that policies aimed at reducing initial inequality using public debt may, in fact, increase wealth inequality in the long run.

Organisation(s)
External organisation(s)
European University at St. Petersburg, Paris School of Economics
Journal
Journal of Economic Behavior and Organization
Volume
170
Pages
96-111
No. of pages
16
ISSN
0167-2681
DOI
https://doi.org/10.1016/j.jebo.2019.11.029
Publication date
02-2020
Peer reviewed
Yes
Austrian Fields of Science 2012
502018 Macroeconomics, 502046 Economic policy, 502047 Economic theory
Keywords
ASJC Scopus subject areas
Economics and Econometrics, Organizational Behavior and Human Resource Management
Portal url
https://ucris.univie.ac.at/portal/en/publications/public-debt-positional-concerns-and-wealth-inequality(59bd3ddc-3a7e-4fbe-9382-da53c6f701e3).html