ASPIRATIONS AND INEQUALITY1

This paper develops a theory of socially determined aspirations as reference points for the in-dividuals. In this theory, society-wide economic outcomes shape individual aspirations, which affect the investment incentives of individuals. Through its impact on investments, individual aspirations in turn affect ambient social outcomes. We explore this two-way link in settings in which aspirations and income (and the distribution of income) evolve jointly. In particular, we explore the relationship between aspirations, growth and widening inequality. Our model cap-tures both the inspiration and the potential frustrations that can result from higher aspirations