26 H. Hayakawa J. of Economic Behavior Org. 43 2000 1–34
What has been confirmed here, therefore, is that human behavior reflects endogenizes and thereby reinforces the social structure of the decision-making environment. As in-
dividuals are oriented to social and cultural norms, such norms become internalized in their preferences. Norm-guided preferences, in turn, serve as an instrument to the repro-
duction and evolution of these norms. Moreover, to the extent that social orientation is a consequence of the imperfect decision-making environment, the social structure reflects
the nature of bounded rationality. Human behavior in society, therefore, rests on a triad of relations involving bounded rationality, the existence of social and cultural norms, and the
formation of norm-guided preferences.
We close this section with an observation that the above norm-oriented choice behavior of an individual who belongs to social group g
m
and has k-relevant social groups, S= {g
1
, . . . , g
m
, . . . , g
k
} can be viewed formally as a demand correspondence D : R
n+1 +
→ G such that
DP , M; x
∗
; zy
j
, g
i
, V dg
i
, g
m
, i = 1, . . . , k, j = 1, . . . , n = {y : y ∈ BP , M ∩ Ax
∗
and F y ≥ F y
′
∀y
′
∈ Ax
∗
∩ BP , M}. This correspondence does not presume that relevant social groups and reaction functions
are exogenous to decision makers. To the extent that reference group taking is very much influenced by one’s economic and social status, which groups to emulate or avoid for
social status identification is as much part of one’s choices as commodity bundles. For this reason, the reference group taking itself should be viewed as a choice correspondence
Ψ g
m
; Z : ˆ S → ˆ
S such that Ψ g
m
; Z = S ⊂ ˆ S,
where Z is an indicator of one’s economic resources such as income and wealth. A reaction function is then formed vis-a-vis the selected reference groups. Such static characterizations
of norm-oriented behavior and the reference-group taking are incomplete and should be supplemented by their dynamic features. But, taken as snapshots, these correspondences
capture choice behavior and reference group taking within a zone of flexible responses that is tied to a position in the social field.
7. Leibenstein and Duesenberry revisited
Leibenstein 1950 and Duesenberry 1949 were among the first to address issues per- taining to externalities in consumption. Leibenstein’s classifications of bandwagon, snob,
and Veblen effects still serve as useful characterizations of such externalities. Similarly, Duesenberry’s relative income hypothesis has by no means become a dead idea. With the
resurgence of strong interest in sociological perspectives to consumer behavior, we now relate our model of interdependence via reference groups to the work of Leibenstein and
Duesenberry.
H. Hayakawa J. of Economic Behavior Org. 43 2000 1–34 27
7.1. Leibenstein’s bandwagon, snob, and Veblen effects Leibenstein 1950 argued that a market demand schedule cannot be obtained merely
by adding individuals’ demand schedules when externalities, such as bandwagon, snob, and Veblen effects, are present in consumption. Two points of difficulty were noted in
incorporating such externalities into the neoclassical demand theory. One pertained to the assumption to be made about the nature and the amount of information that individual
agents are likely to possess, and the other to the assumption to be made on their behavior. Our model of choice decision making is relevant to both of these points. The amount of
information that a decision maker possesses is reflected in the shape of his reaction function through the communication principle, and this reaction function, when convoluted with
the information about the whereabouts of social norms, in particular, with the popularity indicators of choice objects, can quantify the social want-satisfying property.
We find it useful to characterize Leibenstein’s bandwagon, snob, and Veblen effects in terms of the characteristics of the demand correspondence above. Suppose, we take an
individual who belongs to group g
m
with social status rg
m
=r
m
, and examine how this individual responds to an increase in the popularity of a choice object y among members of
a higher status reference group at least some distance away. That is, we study ∆y∆zy, g
i
for group g
i
∈S whose social status rank is non-trivially higher than his; 1y denotes change in y and zy, g
i
is the popularity indicator above. If this quantity turns out to be positive, the individual’s demand for y may be said to exhibit Veblen effects or emulation effects.
But, with our measurement of social want-satisfying property, this response is positive only if the individual’s reaction function takes a positive value for the reference group in
question. This implies that the fact that a reference group is higher in social status alone is not enough to generate Veblen effects. If social sanctions against deviant behavior the
sociological principle and the limitation of useful factual information the communication principle dominate the positive psychic satisfaction from upper status identification the
psychological principle, the individual’s reaction function may take a negative value even for a higher status group. If this is the case, for a higher status group, an increase in the
popularity of a choice object among its members does not give rise to Veblen effects.
Veblen effects. Veblen effects emulation effects from group g
i
∈S are present in an individual’s demand for y if 1y1zy, g
i
0 and if the social status rank of g
i
is non-trivially higher than his. Such effects arise only if his reaction function takes a positive value for the
group, i.e., Vdg
i
, g
m
0. If the response to an increase in the popularity of object y in a lower status reference
group is to reduce consumption of y, the individual must be avoiding the image of being associated with this group. Such responses constitute snob effects. But, again, snob effects
are not synonymous to avoiding whatever is popular in lower status groups. For those groups that are lower but not so distant in social status, positive sanctions for conformity and the
amount of useful factual information may outweigh the psychic dissatisfaction from lower status identification, in which case the reaction function takes positive values. As long as
this is the case, an increase in the popularity of object y in a somewhat lower status group may actually encourage the individual to consume more of it. Thus, the snob effects should
be reserved for those groups that are low enough in social status for the reaction function to take negative values.
28 H. Hayakawa J. of Economic Behavior Org. 43 2000 1–34
Snob effects. Snob effects avoidance effects from group g
i
∈S of lower social status are present in the individual’s demand for y if 1y1zy, g
i
0. Such effects are present only if his reaction function takes a negative value for the group, i.e., Vdg
i
, g
m
0. The reaction function will, in general, take negative values for groups that are substantially
higher in social status. For such groups, negative sanctions against deviant behavior and the lack of factual information for emulation will dominate even the psychic satisfaction so
that the reaction function takes negative values. An increase in the popularity of object y among members of such groups will reduce its social want-satisfying property. Such effects
are distinctly different from snob effects, which only apply to groups with sufficiently low social statuses.
For the group to which the individual belongs to and for those groups that are within a small social distance from the one of his belonging, the reaction function takes positive
values, so that an increase in the popularity of a choice object among such groups invites favorable responses. These responses can be identified as bandwagon effects to the extent
that the individual finds it socially meaningful to consume those goods that are in vogue in groups that are clustered in social distance around his, although such effects may be more
safely reserved for externalities that cut across groups of many social statuses.
Bandwagon effects. Bandwagon effects from group g
i
∈S are present in the individual’s demand for y if 1y1zy, g
i
0 and if g
i
is within a small social distance from his. Such effects arise only if his reaction function takes a positive value for the group, i.e., Vdg
i
, g
m
0. Note that while Leibenstein applied such classifications to aggregate demand behavior, it
is useful to apply them to demand behavior at the level of individual consumers. The aggre- gate demand behavior, being a mixture of all three effects, may exhibit, in net, Veblen, snob,
or bandwagon effects, but such classifications on a disaggregate level serve to characterize the origins of externalities that arise from reference group taking and social status seeking,
and by so doing, bring to light some of the underlying forces of social dynamics.
7.2. Duesenberry’s model of social interdependence Duesenberry 1949 attempted to reformulate traditional consumer theory to resolve an
apparent contradiction between the long-run constancy of the saving–income ratio and its cyclical fluctuations. In doing so, he introduced two notions: the interdependence of
preferences among consumers and the non-reversibility of consumption over time. Consider a situation analyzed by Duesenberry, in which there are a finite number of
socially interdependent individuals whose utility functions are written as a function of their own consumption and assets over some finite planning horizon, each deflated by a weighted
average of all individuals’ current consumption. If these utility functions are maximized sub- ject to initial holdings of assets and to current and expected incomes and interest rates, each
individual’s deflated current consumption becomes a function of his own current and ex- pected incomes, his deflated initial holdings of assets, and current and expected interest rates.
Thus, consumption behaviors of all individuals taken as a group are described by a system of these functions. Under the continuity and the convexity of preferences, a unique solution
to the system can be found as long as the system is consistent. The crucial feature of this system is that it is homogeneous in that if certain values of consumption of all individuals
H. Hayakawa J. of Economic Behavior Org. 43 2000 1–34 29
are a solution under a given set of current and expected incomes and initial asset holdings of all individuals given also current and expected interest rates, then these consumption
values multiplied by a common positive factor are also a solution if all the income and asset quantities in the set are multiplied by the same factor. This property follows directly
from the fact that the individuals’ utility functions are homogeneous of degree zero in own consumption and assets over the planning horizon and current consumption of all
interdependent individuals see Clower, 195152 for more general conditions.
While this homogeneity property describes consumer behavior in steadily growing sit- uations, consumers in recessions do not easily retreat from the standards of living that the
preceding booms made possible. This reluctance causes consumption to be irreversible in time with the saving–income ratio declining during recessions. Hence, over time one ob-
serves an upward drift of living standards, which gives rise to ratchet effects in the aggregate consumption function.
The way our reaction function shifts over different phases of business cycles offers a new perspective to such ratchet effects. Recall the economic principle underlying a reaction
function, which captures both the cost risk of trying something new and the cost of gathering information about life styles of other social groups. These costs, as argued then,
increase symmetrically as functions of social distance. Call their composite the economic cost function.
Changes in the position of the economic cost function affects the shape of a reaction function, hence the degrees to which different statuses are sought or avoided. If the econ-
omy is steadily growing with rising current and expected incomes and asset positions, the economic cost pressures will ease to allow more vigorous emulation of higher status groups.
Accordingly, an individual’s reaction function will have a wider spread and tilt more toward higher status groups.
When a recession sets in, there will be contractions in current and expected incomes and asset positions. Deviations from a current life style become costlier, and so does to
gather information on the life styles of various social groups. Such increased cost pressures cause an individual’s reaction function to have a narrower spread with its hump centered
around the zero social status disparity. In a recession, therefore, an individual becomes less aggressive at emulation and clings to what has already been achieved. As the economy
regains its normal growth, the cost pressures ease again to restore the reaction function to its original position favoring a more vigorous emulation of higher status groups.
To explain Duesenberry’s ratchet effects, we combine this shifting of reaction functions with the fact that an affluent society has an important pair of hierarchies ordered by social
prestige, status, or even cost. One is on goods, commanding that socially more prestigious goods be costlier than less prestigious ones. The other is on income with higher income
commanding higher social prestige and status. Given these hierarchies, the income level of an individual places him at a certain position in the income hierarchy, and he will choose
to live a life style fit to its social status. Where he is in the income hierarchy then dictates the average prestige or costliness of goods to be consumed and the average committed
expenditure to live the chosen life-style.
As an individual climbs up the income ladder in booms, his reaction function shifts in favor of more vigorous emulation of higher status groups, therefore, in favor of the life styles
that demand more prestigious goods. This raises both the average costliness of goods to be
30 H. Hayakawa J. of Economic Behavior Org. 43 2000 1–34
consumed and the average committed expenditure required of new life styles. As income declines in a recession, an individual’s reaction function slides back to its conservative
position, and there will be a tendency to adhere to the life style that has already been achieved. This life style has a certain social prestige, requiring accordingly a certain level of
committed expenditures to sustain it. Thus, such shifting of an individual’s reaction function over different phases of a business cycle, combined with the pair of hierarchies on goods and
income, can explain Duesenberry’s ratchet effects in the aggregate consumption function.
Other principles underlying the reaction function also contribute to such effects. For instance, in a steadily growing full employment economy, one’s neighbors, friends, and
associates will be trying new commodities more frequently than in recessions. Therefore, the amount of useful factual information passed on to individuals will increase. Moreover,
with more frequent attempts at something new, social sanctions against deviant behavior will ease, which creates a more conducive environment to upper status seeking. Thus, the
communicational and sociological principles tend to reinforce the economic principle in the shifting of the reaction function over business cycles. The ratchet effects, therefore, become
all the more plausible when the four principles are jointly considered.
8. Conclusion
