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Keeping Up with the Neighbors: Social Interaction in a Market Economy

Author Info

  • Christian Ghiglino
  • Sanjeev Goyal

Abstract

We consider a world in which individuals have private endowments and trade in markets while their utility is negatively affected by the consumption of their neighbors. Our interest is in understanding how the social structure of comparisons, taken together with the familiar fundamentals of the economy (endowments, technology, and preferences), shapes equilibrium prices, allocations, and welfare. We show that equilibrium prices and consumption are a function of a single network statistic: centrality. An individual's "centrality" is given by the weighted sum of paths of different lengths to all others in a social network. In particular, prices are proportional to the sum of centralities, and an individual's consumption depends on how central she is relative to others in the network. Inequalities in wealth and connections reinforce each other in markets: A transfer of resources from less to more central agents raises prices. As segregated communities become integrated, the poor lose while the rich gain in utility! (JEL: D5, D6, D85) (c) 2010 by the European Economic Association.

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Article provided by MIT Press in its journal Journal of the European Economic Association.

Volume (Year): 8 (2010)
Issue (Month): 1 (03)
Pages: 90-119

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Handle: RePEc:tpr:jeurec:v:8:y:2010:i:1:p:90-119
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Find related papers by JEL classification:
  • D5 - Microeconomics - - General Equilibrium and Disequilibrium
  • D6 - Microeconomics - - Welfare Economics
  • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation

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  1. Galeotti, Andrea, 2005. "Consumers networks and search equilibria," Working Papers 1225, California Institute of Technology, Division of the Humanities and Social Sciences.
  2. Dilip Mookherjee & Stefan Napel & Debraj Ray, 2008. "Aspirations, Segregation and Occupational Choice," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-182, Boston University - Department of Economics.
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Cited by:

  1. Marjit, Sugata & Mandal, Biswajit, 2011. "Conspicuous Consumption, Social Status and Measures of Poverty – An Example," MPRA Paper 33745, University Library of Munich, Germany, revised Apr 2011.
  2. Marjit, Sugata & Santra, Sattwik & Hati, Koushik Kumar, 2014. "Does inequality affect the consumption patterns of the poor? – The role of “status seeking” behaviour," MPRA Paper 54118, University Library of Munich, Germany.
  3. Marjit, Sugata & Roy, Ranjan, 2010. "Conflicting Measures of Poverty and Inadequate Saving by the Poor – The Role of Status Driven Utility Function," MPRA Paper 27472, University Library of Munich, Germany.
  4. Liu, Xiaodong & Patacchini, Eleonora & Zenou, Yves, 2014. "Endogenous peer effects: local aggregate or local average?," Journal of Economic Behavior & Organization, Elsevier, vol. 103(C), pages 39-59.
  5. Marjit, Sugata & Roychowdhury, Punarjit, 2011. "Status, Poverty and Trade," MPRA Paper 33730, University Library of Munich, Germany.
  6. Dilip Mookherjee & Stefan Napel & Debraj Ray, 2010. "Aspirations, Segregation, and Occupational Choice," Journal of the European Economic Association, MIT Press, vol. 8(1), pages 139-168, 03.
  7. Christian Ghiglino, 2011. "When Veblen meets Krugman," 2011 Meeting Papers 768, Society for Economic Dynamics.
  8. Lombardo, Vincenzo, 2012. "Social inclusion and the emergence of development traps," MPRA Paper 36766, University Library of Munich, Germany.
  9. Bloch, Francis & Quérou, Nicolas, 2013. "Pricing in social networks," Games and Economic Behavior, Elsevier, vol. 80(C), pages 243-261.
  10. Liu, Xiaodong & Patacchini, Eleonora & Zenou, Yves, 2011. "Peer Effects in Education, Sport, and Screen Activities: Local Aggregate or Local Average?," CEPR Discussion Papers 8477, C.E.P.R. Discussion Papers.
  11. Sugata Marjit & Sattwik Santra & Koushik Kumar Hati, 2014. "Does inequality affect the consumption patterns of the poor? – The role of status seeking behaviour," Discussion Papers Series 514, School of Economics, University of Queensland, Australia.
  12. Patacchini, Eleonora & Venanzoni, Giuseppe, 2014. "Peer effects in the demand for housing quality," Journal of Urban Economics, Elsevier, vol. 83(C), pages 6-17.
  13. Belhaj, Mohamed & Deroïan, Frédéric, 2013. "Strategic interaction and aggregate incentives," Journal of Mathematical Economics, Elsevier, vol. 49(3), pages 183-188.
  14. Marjit, Sugata, 2012. "Conflicting Measures of Poverty and Inadequate Saving by the Poor," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  15. Gauvin, Laetitia & Vignes, Annick & Nadal, Jean-Pierre, 2013. "Modeling urban housing market dynamics: Can the socio-spatial segregation preserve some social diversity?," Journal of Economic Dynamics and Control, Elsevier, vol. 37(7), pages 1300-1321.
  16. Chen, Xi & Zhang, Xiaobo, 2011. "Peer Effect, Risk-Pooling and Status Seeking: Which Matters to Gift Spending Escalation in Rural China?," 2011 Annual Meeting, July 24-26, 2011, Pittsburgh, Pennsylvania 103643, Agricultural and Applied Economics Association.
  17. Fares Al-Hussami & Álvaro Martín Remesal, 2012. "Current Account Imbalances and Income Inequality: Theory and Evidence," Kiel Advanced Studies Working Papers 459, Kiel Institute for the World Economy.

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