We analyze a model in which there is socially inefficient competition among people. In this model, self-enforcing social norms can potentially control the inefficient competition. However, the inefficient behavior often cannot be suppressed in equilibrium among those with the lowest income due to the ineffectiveness of sanctions against those in the society with the least to lose. We demonstrate that in such cases, it may be possible for society to be divided into distinct classes, with inefficient behavior suppressed in the upper classes but not in the lower.
Published in: _Journal of Public Economics_ (Vol. 70, No. 1, October 1998, pp. 5-35) https://doi.org/10.1016/S0047-2727(98)00058-9.