Changing your role models: Social learning and the Engel curve

By relating Engel curves and social learning, we explain the existence of differently shaped Engel curves—an interesting phenomenon in the theory of demand. A formal approach to cultural learning within a population of consumers accounts for some cognitive foundations of these demand patterns. We find that a changing influence of an individual's role models due to her increasing income, which entails new reference groups providing social identity, leads to the diffusion of new consumption behaviors. Thereby, the resulting Engel curves’ shape depends on the underlying learning dynamics. The approach contributes to an explanation of structural change and economic development.