The Distributional Effects of Peer and Aspirational Pressure

We develop a theoretical framework where the cross-sectional distributions of hours, earnings, wealth and consumption are determined jointly with a set of expenditure targets defining peer and aspirational pressure for members of different social classes. We show existence of a stationary socio-economic equilibrium, under stochastic productivity and socio-professional class participation. We calibrate a model belonging to this framework using British data and find that it captures the main patterns of inequality, between and within the social groupings. We discover a complex pattern of how peer and aspirational pressure affects within- and cross-group inequality depending on both group membership and the inequality measure considered. A principal finding is that wealth and consumption inequality increase within groups who aspire to match social targets from a higher class, despite a reduction in within-group inequality in hours and earnings. Such aspirations can thus lead to social frustration, associated with increases in the dispersion of economic outcomes, and hence in the magnitude and likelihood of underachievement in meeting consumption targets.