Discussion paper
DP17181 Loss Aversion and Conspicuous Consumption in Networks
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.
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