Theory Workshop - Yiyi Li (Cambridge)

Title: Getting Ahead of the 'Joneses': Upward Comparison in Network Formation

Abstract:

Individuals have natural tendencies to associate with those slightly better than
themselves. This paper studies the behaviour of upward affiliation in network formation. By combining models of conspicuous consumption and game of status, the paper finds that individuals have strongest incentives to make upward comparison if her income range is densely populated. But aversion to disadvantageous inequality will prevent individuals from comparing with those far better than themselves.

This paper also conducts comparative statics analysis of the impact of income distribution on upward comparison and welfare. It is concluded that if income distribution of one society first-order stochastically dominates that of the other, the rich will have stronger incentives to make upward comparison, while everyone is worse off; If income distribution in one society second-order stochastically dominates the other, the middle class has stronger incentives to make upward comparison, while the poor are worse off.