Modeling Luxury Consumption: An Inter-Income Classes Study of Demand Dynamics and Social Behaviors

In this paper we develop an agent-based model of conspicuous consumption built on well-established social behaviours. The process of preference formation, based on imitation and differentiation under cognitive limitations, endogenously generates class-specific consumption profiles. Considering consumption as competition among households to obtain social recognition, we find that low levels of 'social competition' increases individual well-being. Especially, the desire to imitate 'social models' of consumption appears as the main determinant of individual well-being dynamics. According to the model, public policies, when aiming to reduce income inequality, are efficient for increasing 'subjective well-being' in the economy, however, well-being improvements are low when demonstration effects and consumption standards are high.