Status Consumption in Networks: a Reference Dependent Approach

We introduce loss aversion into a model of conspicuous consumption in networks. Agents allocate heterogeneous incomes between a conventional good and a status good. They interact over a connected network and compare their status consumption to their neighbors' average consumption. We find that aversion to lying below the social reference point has a profound impact. If loss aversion is large relative to income heterogeneity, a continuum of conformist Nash equilibria emerges. Agents have the same status consumption, despite differences in incomes and network positions, and the equilibrium is indeterminate. Otherwise, there is a unique Nash equilibrium and status consumption depends on the interplay between network positions and incomes. This equilibrium still displays inaction bands, i.e., zones of the parameter space of positive measure where actions are invariant to income changes. Our results have important policy implications regarding income redistributions and changes in social contacts. Our analysis extends to homothetic and heterogeneous preferences.