Status substitution and conspicuous consumption

Abstract

This paper adapts ideas from social identity theory to set out a new framework for modelling conspicuous consumption. Agents derive utility from their consumption of a status good and from belonging to an identity group with high status good consumption. Importantly, these two sources of utility are substitutes. Agents also feel pressure to conform with their neighbours in a network. This framework can rationalise a set of seemingly conflicting stylised facts about conspicuous consumption that are currently explained by different families of models. In addition, our model delivers new testable predictions regarding the effect of network structure and income inequality on conspicuous consumption.