and two referees for significant comments on a former version of this paper. We are also grateful to participants of the following workshops and conferences for providing useful suggestions:

and two referees for significant comments on a former version of this paper. We are also grateful to participants of the following workshops and conferences for providing useful suggestions:

No abstract

This article advances the hypothesis that the intensity of status preferences depends negatively on the average wealth of society (endogenous dynamic status effect), in accordance with empirical evidence. Our theory replicates the contradictory historical facts of an increasing saving rate along with declining returns to capital over time. By affecting the dynamics of the saving rate, the dynamic status effect raises inequality, thereby providing a behavioral mechanism for the observed diverse dynamics of income inequality across countries. In countries in which the dynamic status effect is strong (weak), inequality rises (declines) over time in response to a positive productivity shock.