Can social interaction contribute to explain business cycles?
Recent literature has been able to include into standard optimal growth models some hypotheses that allow for the generation of endogenous long run fluctuations. This paper contributes to this endogenous business cycles literature by considering social interactions. In the proposed model, individuals can choose, under a discrete choice rule, to which social group they prefer to belong to. This selection process is constrained essentially by the dimension of the group, which is the main determinant regarding the utility individuals withdraw from social interaction. The proposed setup implies the presence of cycles and chaotic motion describing the evolution of group dimension over time. Because being member of a group involves costs to households, the inclusion of these costs in a standard Ramsey growth model will imply that endogenous cycles might arise in the time trajectory of the growth rate of output.
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