When Veblen meets Krugman
AbstractWe 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 InfoPaper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 768.
Date of creation: 2011
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