When Veblen meets Krugman

Abstract

We introduce relative concerns in the form of conspicuous consumption in a standard economic geography model a la Krugman. The primary intuition is that conspicuous consumption imposes a negative externality on some agents and generates a centrifugal force. We show that this is not always the case as the relative concern also rises the demand for the sophisticated good, strengthening the standard centripetal market size effect. We show that the resulting force is very sensitive to the topology of the network of "conspicuous" links in each region and on the level of economic integration. For instance, with relatively large shares of income devoted to the consumption of the standard good, we show that when trade is moderately costly and classes of workers are segregated, relative concerns tends to stabilize the symmetric equilibrium; on the other hand, if workers of different classes interact via their relative concerns, conspicuous consumption is a centripetal force generating stable fully or partially agglomerated equilibria. Finally, when the level of integration is high, the intuition holds and even small relative concerns destabilize the full agglomeration equilibrium, which is stable in the Krugman model