Time preference, wealth and utility inequality: A microeconomic interaction and dynamic macroeconomic model connection approach

Abstract: Based on interactions between individuals and others and references to social norms, this study reveals the impact of heterogeneity in time preference on wealth distribution and inequality. We present a novel approach that connects the interactions between microeconomic agents that generate heterogeneity to the dynamic equations for capital and consumption in macroeconomic models. Using this approach, we estimate the impact of changes in the discount rate due to microeconomic interactions on capital, consumption and utility and the degree of inequality. The results show that intercomparisons with others regarding consumption significantly affect capital, i.e. wealth inequality. Furthermore, the impact on utility is never small and social norms can reduce this impact. Our supporting evidence shows that the quantitative results of inequality calculations correspond to survey data from cohort and cross-cultural studies. This study's micro-macro connection approach can be deployed to connect microeconomic interactions, such as exchange, interest and debt, redistribution, mutual aid and time preference, to dynamic macroeconomic models.