Aspirations and Inequality

Abstract The premise of this paper is twofold. First, people's aspirations for their future wellbeing (or that of their children) affect their incentives to invest. Second, the experiences of others help shape one's aspirations. This paper marries a model of aspirations-based choice with a simple theory of aspirations formation to study the relationship between aspirations and the distribution of income. Through its impact on investments, aspirations affect economic mobility and the income distribution, which in turn shape aspirations. Thus aspirations, income, and the distribution of income evolve jointly, and in many situations in a self-reinforcing way. We study the consequences of this model for income distribution as well as for growth rates over different quantiles of the distribution. We show that extreme equality is unstable. Moreover, when the same aspirations are shared in a society, polarization arises. The theory we propose captures both the complacency stemming from low aspirations and the frustration resulting from aspirations that are too high. As a result, for commonly held aspirations, growth rates have an inverted U-shape along the income distribution. JEL Classification Numbers: J62, D9, O15, 040