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Optimal Consumption Decisions under Social Interactions

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Abstract

This paper examines the extent to which social interactions affect optimal consumption decisions in peer groups. To this purpose, a standard life-cycle model with quadratic utility is augmented to allow for three different forks of social interaction, namely, conformism, altruism, and jealousy. The analysis of this model also allows for habit formation, and is carried out under both homogeneous and disparate information sets. An important feature of the resulting individual-specific and group-average optimal consumption decisions is that even if individuals' preferences include a (potentially strong and possibly heterogeneous) motive for social interactions, under certain conditions these decisions will be equivalent to those in a peer group of self-centred individuals who attach no value to social interactions. The paper also provides a relatively simple framework for the empirical analysis of consumption behaviour in peer groups.

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  • Binder, M. & Pesaran, M. H., 1998. "Optimal Consumption Decisions under Social Interactions," Cambridge Working Papers in Economics 9805, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:9805
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    Cited by:

    1. Ioannides, Yannis M., 2002. "Residential neighborhood effects," Regional Science and Urban Economics, Elsevier, vol. 32(2), pages 145-165, March.
    2. Ioannides, Yannis M., 2003. "Interactive property valuations," Journal of Urban Economics, Elsevier, vol. 53(1), pages 145-170, January.
    3. John Gathergood, 2011. "Debt and Depression: Evidence on Casual Links and Social Stigma Effects," Discussion Papers 11/10, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    4. John Gathergood, 2013. "An Instrumental Variable Approach To Unemployment, Psychological Health And Social Norm Effects," Health Economics, John Wiley & Sons, Ltd., vol. 22(6), pages 643-654, June.

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