Other-Regarding Uzawa Preferences and Living Standard Catch-Up

Abstract

This paper provides a new rationale for Uzawa preferences based on social choice; instead of positing that poor people are more patient because they are poor, it posits that poor people should be more patient if they wish their living standards to catch up with richer people. To provide a setting for this new rationale, the present paper studies the socially optimal choice of living standards over time by social planners for countries that, from low levels of total factor productivity (TFP), experience a gradual catch-up of their TFP level with that of the leader country. In the TFP catch-up scenario, the socially optimal choice of consumption and saving based on time additive preferences leads to no catch-up of living standards. To generate living standard catch-up we propose other-regarding Uzawa preferences, in which the rate of time preference is influenced by the gap in living standards between follower country and leader country. This other-regarding specification is consistent with recent findings emphasized in behavioural economics. The other-regarding Uzawa preferences form is illustrated quantitatively by simulating a model of the world economy.