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When Veblen meets Krugman

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  • Christian Ghiglino

    (University of Essex, UK)

Abstract

We introduce relative concerns in the form of conspicuous consumption in a standard economic geography model a la Krugman. The keeping up with the Joneses effect brings a negative externality to some agents and gives them incentives to escape. The primary intuition is then that conspicuous consumption is a centrifugal force. We show that this is not the case as the intuition ignore the positive effect on demand that strengthen the market size effect in the Krugman model. The rise in profits also increases the supply leading to a fall in the price of living, strengthening the "cost-of-living" effect. These two effects are centripetal and can more than offset the intuitive centrifugal forces. In fact, we show that when trade is moderately costly, relative concerns tends to destabilise the symmetric equilibrium and generate stable fully or partially agglomerated equilibria. The bifurcation analysis shows that a pitchfork pattern can emerge with a continuous and easily reversible transition from symmetry to agglomeration when the openness to trade increases. On the other hand, when the cost of trade becomes very small relative concerns destabilizes the full agglomeration equilibrium.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 768.

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Date of creation: 2011
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Handle: RePEc:red:sed011:768

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  1. Pflüger, Michael P. & Suedekum, Jens, 2007. "On Pitchforks and Tomahawks," IZA Discussion Papers 3258, Institute for the Study of Labor (IZA).
  2. Andrew B. Abel, . "Asset Prices Under Habit Formation and Catching Up With the Jones," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 01-90, Wharton School Rodney L. White Center for Financial Research.
  3. Berliant, Marcus & Kung, Fan-chin, 2009. "Bifurcations in Regional Migration Dynamics," MPRA Paper 13053, University Library of Munich, Germany.
  4. Ludema, Rodney D & Wooton, Ian, 1997. "Regional Integration, Trade, and Migration: Are Demand Linkages Relevant in Europe?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1656, C.E.P.R. Discussion Papers.
  5. Veblen, Thorstein, 1899. "The Theory of the Leisure Class," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, McMaster University Archive for the History of Economic Thought, number veblen1899.
  6. TABUCHI, Takatoshi & THISSE, Jacques-François, . "Taste heterogeneity, labor mobility and economic geography," CORE Discussion Papers RP, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) -1570, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  7. Liu, Xiaodong & Patacchini, Eleonora & Zenou, Yves, 2011. "Peer Effects in Education, Sport, and Screen Activities: Local Aggregate or Local Average?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8477, C.E.P.R. Discussion Papers.
  8. Christian Ghiglino & Sanjeev Goyal, 2008. "Keeping up with the neighbours: social interaction in a market economy," Economics Discussion Papers, University of Essex, Department of Economics 655, University of Essex, Department of Economics.
  9. Murata, Yasusada, 2003. "Product diversity, taste heterogeneity, and geographic distribution of economic activities:: market vs. non-market interactions," Journal of Urban Economics, Elsevier, vol. 53(1), pages 126-144, January.
  10. Antonella Nocco, 2009. "Preference Heterogeneity And Economic Geography," Journal of Regional Science, Wiley Blackwell, Wiley Blackwell, vol. 49(1), pages 33-56.
  11. David G. Blanchflower & Andrew J. Oswald, 2000. "Well-Being Over Time in Britain and the USA," NBER Working Papers 7487, National Bureau of Economic Research, Inc.
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Cited by:
  1. Helsley, Robert W. & Zenou, Yves, 2011. "Social Networks and Interactions in Cities," IZA Discussion Papers 5506, Institute for the Study of Labor (IZA).

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