This paper analyzes the aggregate growth and distributional effects of tax policy using an endogenous growth model with heterogeneous agents having “catching up with the Joneses” (CUJ) types of preferences. We characterize the aggregate equilibrium of this economy, as well as its distributional properties, and show that the consumption externality present with CUJ preferences produces greater income inequality than is obtained with conventional time-separable preferences. The consumption externality substantially alters the effects of tax policy, mostly quantitatively, but in some cases qualitatively as well. Extensive numerical simulations are conducted and used to compare the consequences of different modes of taxation, highlighting the tradeoffs involved.

This article discusses the limitations of the orthodox economic theory of the firm as a nexus of contracts. Various experimental studies have shown that the aggregation of individuals in groups changes behaviour and preferences systematically. This perspective has been formalised by models of interdependent preferences. Based on a prominent approach of interdependent preferences, intention-based preferences, two types of labour contracts, incentive contracts and bonus contracts are analysed. Results are compared with the predictions of the orthodox economic theory.