This paper examines the influence of fashion on wealth accumulation in an economy with two groups of agents. Fashion is modelled as an externality generated by a particular dependence of individual agents' time preference on the two groups' per-capita consumption habits. It is shown that fashion causes excessive wealth fluctuations in the sense that stronger and more persistent fashion is more likely to generate limit cycles in wealth. Opposite to intuitive arguments, however, the externality in fashion does not necessarily generate instability in wealth. In a special case, equilibrium consumption and wealth are stable but the optimal ones that internalize the externality are locally unstable. Whether equilibrium consumption is excessive relative to optimal consumption depends on the distribution as well as the aggregate level of wealth.
All Science Journal Classification (ASJC) codes
- Economics and Econometrics