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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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  • Christian Ghiglino, 2011. "When Veblen meets Krugman," 2011 Meeting Papers 768, Society for Economic Dynamics.
  • Handle: RePEc:red:sed011:768
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    Cited by:

    1. Helsley, Robert W. & Zenou, Yves, 2014. "Social networks and interactions in cities," Journal of Economic Theory, Elsevier, vol. 150(C), pages 426-466.
    2. Sato, Yasuhiro & Zenou, Yves, 2015. "How urbanization affect employment and social interactions," European Economic Review, Elsevier, vol. 75(C), pages 131-155.
    3. Zenou, Yves, 2013. "Spatial versus social mismatch," Journal of Urban Economics, Elsevier, vol. 74(C), pages 113-132.
    4. Sergey Kichko & Pierre M. Picard, 2018. "Heterogeneity in Conformism, Firm Selection, and Home Bias," DEM Discussion Paper Series 18-09, Department of Economics at the University of Luxembourg.
    5. José M. Gaspar, 2018. "A prospective review on New Economic Geography," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 61(2), pages 237-272, September.
    6. Christian Ghiglino & Antonella Nocco, 2017. "When Veblen meets Krugman: social network and city dynamics," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 63(2), pages 431-470, February.

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    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F15 - International Economics - - Trade - - - Economic Integration
    • F20 - International Economics - - International Factor Movements and International Business - - - General
    • F22 - International Economics - - International Factor Movements and International Business - - - International Migration
    • R23 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Regional Migration; Regional Labor Markets; Population

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