When Veblen meets Krugman: social network and city dynamics

The present paper explores the role of the social structure of suburban areas on city dynamics. We focus on relative concerns in the form of conspicuous consumption and introduce them into a standard economic geography model a la Krugman. We show that the level of social integration within the suburban areas of cities and the level of economic integration across cities are crucial in determining the city sizes. An interesting case arises with moderate trade costs when relatively small shares of income are devoted to the consumption of the differentiated good: if classes of workers are segregated (as in homogenous suburban areas), relative concerns tend to generate dispersed, medium-size cities; when workers of different classes socially interact, relative concerns contribute to foster socially integrated megalopolises. This result shows that keeping-up-with-the-Joneses motives may generate counterintuitive results when agents are able to choose their location.