Consumer demand with social interactions: a simulation study

Abstract

How do social interactions affect consumer demand? In this paper, I investigate the effects that different social structures have on social welfare and on the budget shares of various categories of goods. A society is modeled in which households' demand for goods is described by a Linear Expenditure System with Social Interactions (LES-SI). In the context of the LES-SI, I find that social interactions can lead to a considerable reallocation of resources over goods. The differences in effect are small for the different social structures. Optimal taxes and subsidies set by a welfare maximizing social planner are explicitly calculated. Interestingly, the budget share and optimal tax rate of the most conspicuous good do not necessarily increase when the degree of interactions increases. The presence of social interactions does not make the tax and subsidy instrument more effective in terms of the increase in social welfare that can be obtained