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When Veblen meets Krugman

  • Christian Ghiglino

    (University of Essex, UK)

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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Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 768.

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Date of creation: 2011
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Handle: RePEc:red:sed011:768
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  1. TABUCHI, Takatoshi & THISSE, Jacques-François, . "Taste heterogeneity, labor mobility and economic geography," CORE Discussion Papers RP -1570, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Abel, A.B., 1990. "Asset Prices Under Habit Formation And Catching Up With The Joneses," Weiss Center Working Papers 1-90, Wharton School - Weiss Center for International Financial Research.
  3. Christian Ghiglino & Sanjeev Goyal, 2010. "Keeping Up with the Neighbors: Social Interaction in a Market Economy," Journal of the European Economic Association, MIT Press, vol. 8(1), pages 90-119, 03.
  4. Pflüger, Michael P. & Suedekum, Jens, 2007. "On Pitchforks and Tomahawks," IZA Discussion Papers 3258, Institute for the Study of Labor (IZA).
  5. Antonella Nocco, 2009. "Preference Heterogeneity And Economic Geography," Journal of Regional Science, Wiley Blackwell, vol. 49(1), pages 33-56.
  6. Murata, Yasusada, 2003. "Product diversity, taste heterogeneity, and geographic distribution of economic activities:: market vs. non-market interactions," Journal of Urban Economics, Elsevier, vol. 53(1), pages 126-144, January.
  7. Rodney D. Ludema & Ian Wooton, 1997. "Regional Integration, Trade, and Migration: Are Demand Linkages Relevant in Europe?," Working Papers 9704, Business School - Economics, University of Glasgow, revised Jul 1997.
  8. Fan-chin Kung, 2004. "Bifurcations in regional migration dynamics," Urban/Regional 0409008, EconWPA, revised 12 Sep 2004.
  9. Blanchflower, David G. & Oswald, Andrew J., 2001. "Well-Being Over Time in Britain and the USA," The Warwick Economics Research Paper Series (TWERPS) 616, University of Warwick, Department of Economics.
  10. eleonora patacchini & Yves Zenou & Xiaodong Liu, 2012. "Peer effects in education, sport and screen activities: local aggregate or local average?," 2012 Meeting Papers 1198, Society for Economic Dynamics.
  11. Veblen, Thorstein, 1899. "The Theory of the Leisure Class," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, number veblen1899.
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