Wealth-sensitive positional competition as a source of dynamic complexity in OLG models

This paper examines the interactions between economic activity and consumption externalities in an overlapping generations model. Existence of multiple steady states is studied from a global point of view, and possible mechanisms producing cycles and chaotic behavior are analyzed. Wealth-sensitive positionality is found to be able to generate persistent endogenous fluctuations, whereas wealth-neutral positionality doesn’t. Under wealth-sensitive positionality, the economy may moreover experience complex dynamics, with sensitivity to initial conditions, leading to poverty traps even when starting from relatively large endowments of capital assets.