Consumption Emulation and Demand Regimes: An Inclusive Modeling Approach

Abstract

ABSTRACT Personal income distributions robustly follow a two-class structure, with an exponential bulk of labour income accruing to the lower 95 - 99 % population share and an upper Pareto tail of the 1 - 5% richest, where capital income is concentrated. The implications of this regularity for macroeconomic outcomes, especially aggregate consumption, are not yet fully understood, though. We introduce this two-class structure into a Post-Keynesian consumption model with workers and capitalists corresponding to the two classes within the personal distribution. Agents consume according to idiosyncratic and social motives. Status consumption is microfounded within a perception network that replicates empirically observed inequality and social self-perceptions. Our findings indicate that the non-market interactions in perception networks are potentially highly relevant for aggregate outcomes and that they can shed some light on recent puzzles in the Post-Keynesian literature on growth regimes. In particular, we show how network segregation can explain differences in the degree of ‘wage-ledness’ of aggregate consumption. Aggregate representations of consumption might thus be misleading. Empirical studies should therefore take the regularities both in the income distribution as well as social network topologies into account.