Trade, and Growth Leadership

This paper formalizes international status seeking in a two-country model of endogenous growth: utility of agents in developing countries is a¤ected by consumption gaps with advanced economies. By distorting intertemporal choices, envy tends to revert growth di¤erentials in favor of the developing country when traded goods are substitutes. Notably, asymmetric pref-erences with endogenous status desire generate (i) convergence in growth rates in the presence of structural gaps, and (ii) convergence in income levels, if productivity di¤erences are absorbed by technology di¤usion. This process is driven by declining terms of trade and faster capital accumulation of the status seeker. A calibration exercise shows that the model predictions are consistent with the stylized facts that characterized the growth performance of East Asian economies