Keeping up with the Neighbors: Social Interaction in a Production Economy

It is well-documented that individuals care about how others around them are doing. This paper studies a production economy in which consumers provide labor supply to a representative firm to earn income for consumption, and their utility depends on their own leisure time, their own consumption level, as well as their neighbors’ consumption levels. We characterize the unique equilibrium for such an economy, allowing for three different types of effects of the neighborhood size: linear effect, zero effect, and nonlinear effect. Four network structures (empty network, ring network, star network, and core-periphery network) with different production technologies are analyzed. Our work contributes to a better understanding of the general equilibrium effect of social preferences and network structures.