DP17181 Loss Aversion and Conspicuous Consumption in Networks

Author(s): Yann Bramoullé, Christian Ghiglino
Publication Date: April 2022
Keyword(s): Conspicuous consumption, loss aversion, Social Networks
Programme Areas: Organizational Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=17181

We introduce loss aversion into a model of conspicuous consumption in networks. Agents allocate their income between a standard good and a status good to maximize a Cobb-Douglas utility. Agents interact over a connected network and compare their status consumption to their neighbors' average consumption. Loss aversion has a profound impact. If loss aversion is large enough relative to income heterogeneity, a continuum of Nash equilibria appears and all agents consume the same quantity of status good. Otherwise, there is a unique Nash equilibrium and richest agents earn strict status gains while poorest agents earn strict status losses.