Modeling Peer Choice in a Static Setting : The Roles of Relative Position, Bandwagon Effects, and Reference Income Proximity

This paper presents a simple model of peer selection in a static, single-period model setting. Given the connections between consumption and how one perceives the consumption of peers, this project takes a further step backward in terms of understanding the process of consumer self-segregation into various “classes” or “peer groups” as a result of concerns about relative consumption, the extent to which one is a member of a relatively larger group of consumers (the size of the bandwagon), and the proximity of the peer or reference income. The paper considers the choice process in the context of a single period model where consumers expend all of their resources. It compares social welfare when individuals independently choose their class divisions with social welfare achieved when class boundaries are determined through an external social welfare maximizing process. The paper then goes on to consider a redistributive scheme that would minimize the difference between the social welfare maximum and that achieved when individuals choose their class divisions freely