Fashion and wealth accumulation

This paper examines the influence of fashion on wealth accumulation in an e conomy with two groups of agents. Fashion is modelled as an externality gen erated by a particular dependence of individual agents' time preference on the two groups' per-capita consumption habits. It is shown that fashion cau ses excessive wealth fluctuations in the sense that stronger and more persi stent fashion is more likely to generate limit cycles in wealth. Opposite t o intuitive arguments, however, the externality in fashion does not necessa rily generate instability in wealth. In a special case, equilibrium consump tion and wealth are stable but the optimal ones that internalize the extern ality are locally unstable. Whether equilibrium consumption is excessive re lative to optimal consumption depends on the distribution as well as the ag gregate level of wealth.