Social Status, Education and Government Spending in a Two-Sector Model of Endogenous Growth

This paper extends the relative wealth specification of status preference to the two-sector Uzawa (1965)–Lucas (1988) model and examines the effectiveness of government spending on economic growth. It is found that the desire for relative wealth-induced social status and/or the education component of relative wealth-induced social status are important ingredients in determining the growth rate effects of government spending. Provided that the agent is concerned with his or her relative social position, the education-induced social status plays a more important role than the physical-asset-induced social status in determining the validity of public spending on growth. If individuals do not care about their education-driven social rewards, then an increase in government spending has no effect on the balanced growth rate regardless of the presence of the physical-asset-induced social status. A rise in government spending reduces the long-run growth rate if the education-induced social status is present.