The Social Interaction Model With Production

Kazuto Masuda

Public Relations Department, Bank of Japan

Secretariat of Central Council for Financial Services Information

October 16, 2022

Author Note

Address: 2-1-1 Hongoku-cho, Nihonbashi, Chuo-ku, Tokyo 108-8660, Japan.

Tel: 81-3-3279-111

E-mail: kazuto.masuda1@gmail.com
 Abstract

We incorporate production into Becker and Murphy’s (2000) social interaction model,

based on Kiley (2003). We create a particular utility function for the concrete

calculation of social multiplier effects in our simple general equilibrium model,

satisfying the strict quasi-concavity. When solving our model, we use the Karush-Kuhn-

Tucker theorem, satisfying some general requirements discussed by Fuente (2000) and

Osborne (2022) together with the quasi-concave inequality constraints by correctly

specifying its domain. Our solution with this particular utility function coincides with

the unique global optimum, unlike Brock and Durlauf (1995).

Keywords: general equilibrium, Karush-Kuhn-Tucker theorem, price effect,

social interaction, unique global optimum

JEL classification: D11, D50, C62

 The Social Interaction Model With Production

We provide a particular utility function for the social interaction model developed

by Becker and Murphy (2000). Then, we analyze the behavior of the equilibrium in

comparison with that of a standard business cycle model without this particular utility

function based on Kiley (2003). Furthermore, we calculate the social multiplier effect

under this general equilibrium model. My model is static at first, but we show that our

model could be extended into the dynamic model easily. Additionally, we show the first-

order conditions of our heterogeneous agent model. Finally, we show the existence of

the unique global optimum in this social interaction model with production, using the

results of existing studies in mathematical economics, such as Nishimura (1990),

Sundaram (1996), Fuente (2000), Jehle and Reny (2001), and Osborne (2022).

This particular utility function is based on the Cobb–Douglas utility function but

has additional utility from the behaviors of other consumers in the same community to

which the consumer in question belongs. As a result, this utility function includes the

particular case of social capital, that is, social capital with the perfect depreciation as the

presence of consumers’ horizontal consciousness.

In addition to Becker and Murphy’s (2000) model which analyzes the social

multiplier effect in the consumer’s partial equilibrium with many goods, other models of

1
social interaction exist, including Brock and Durlauf’s (1995), which is a dynamic

model focusing on choice, such as logit. Brock and Durlauf (1995) pointed out the

existence of multiple equilibria and got different conclusions from those reached in this

paper, although they used a different model from the one applied in this paper (i.e., that

of Becker and Murphy, 2000). As for heterogeneity, Aiyagari’s (1994) work is an

example. Although Aiyagari (1994) did not argue for the uniqueness of the optimum in

his model, Achdou et al. (2022) discussed the uniqueness of the optimum in Aiyagari-

type models. For numerical nonlinear programing, an example is the work of Tamura

and Muramatsu (2002).

Mathematically, the strictly quasi-concave function discussed by Nishimura

(1990) is known to guarantee the uniqueness of the optimum. To secure the unique

global maximum in the Karush-Kuhn-Tucker problem we use intensively in this paper,

we extend the mathematical result shown in Dixit (1990), Sundaram (1996), Fuente

(2000), Jehle and Reny (2001), and Osborne (2022) leading to the concave

programming. Note that Becker and Murphy (2000) were not interested in the

uniqueness of the optimum in their model, at least explicitly, because their interest was

mainly in the multiple equilibria and the separating equilibrium in various social

interaction models.

2
 Moreover, in this paper, we focus on consumers’ demand behavior. In this kind of

model, which assumes the existence of social capital, (a) in the utility function, the

choice modeling has already been discussed by Brock and Durlauf (1995). Furthermore,

(b) (depending on the definition of social capital) growth theorists in the late 1980s and

1990s also intensively discussed the firm production model that assumes the existence

of social capital in the production function rather than in the utility function (e.g., Barro

& Sala-i-Martin, 1995).

The remainder of this paper is organized as follows. In A Particular Utility

Function for the Social Interaction Model With Production section, we discuss a

particular utility function that satisfies the conditions for confirming the social

multiplier effect described by Becker and Murphy (2000), after introducing the general

equilibrium model with the standard Cobb–Douglas utility function and no physical

accumulation based on Kiley (2003). Then, using this particular utility function, we

construct our general equilibrium model without physical capital accumulation based on

Kiley (2003) and derive its (unique global as we discuss below) optimum together with

this production function under the Karush-Kuhn-Tucker theorem at the same time

(Karush, 1939; Kuhn & Tucker, 1951). Moreover, we show that the presence of

consumers’ horizontal consciousness, as in the particular utility function discussed in

3
this section, usually increases (decreases) consumption under some conditions, by

further reducing (or further increasing) leisure, compared with the case without the

social multiplier effect. Finally, we detailly discuss the mathematical characteristics of

our particular utility function and our constraints, and confirm the existence of the

unique global optimum in our social interaction model with production. In

Heterogeneity section, we briefly discuss the heterogeneity of consumers and its effect

on our conclusion about the unique global optimum. we conclude that heterogeneity in

our particular setting does not alter our conclusion about the unique global optimum in

our model. In Conclusion section, we summarize our conclusion. In Appendix A, we

briefly discuss our alternate assumption about physical capital accumulation in the

tradition of macroeconomic theory. To be more precise, we argue that Hamiltonian is a

kind of Lagrangian and easily extend our model into the dynamic setting with physical

capital accumulation by Hamiltonian. We also justify our previous no physical capital

accumulation assumption based on the microeconomic tradition in the text, in terms of

how to obtain analytical solutions, reviewing the Kiley’s (2003) solution technique,

based on Bénassy (1995). In Appendix B, we briefly show the effects of the signs of

horizontal consciousness parameters on our conclusions, such as behaviors of the

optimum with numerical simulations, graphically.

4
 A Particular Utility Function for the Social Interaction Model With Production

The Standard Model Based on Kiley (2003)

Based on Kiley (2003), we consider the social planner problem under certain

resource constraints and production technologies, like the following production function

for the case of total physical capital depreciation. This model is almost identical to the

standard business cycle model often discussed in macroeconomics, only without the

physical capital accumulation. More precisely, we assume the investment at the current

period is only effective for the current production, as in many microeconomics

textbooks (see Appendix A for the physical capital accumulation case with

Hamiltonian).

Therefore, for the time being, the following model is essentially static because it

does not consider physical capital accumulation (on this point, I benefited from a

discussion with Professor Akihiko Kaneko. Again, we can extend our model into the

dynamic model with Hamiltonian. See Appendix A).

max 𝑉(𝐶𝑡 , 𝐻𝑡 ) = 𝐷𝐶𝑡𝛼 𝐻𝑡1−𝛼

𝐶𝑡 ,𝐻𝑡 ,𝐼𝑡

𝛽
subject to 𝑌𝑡 ≥ 𝑃𝐶,𝑡 𝐶𝑡 + 𝑃𝐼,𝑡 𝐼𝑡 , 𝑌𝑡 = 𝑍𝑡 𝐼𝑡 (1 − 𝐻𝑡 )1−𝛽 , 𝐶𝑡 , 𝐼𝑡 ≥ 0, 𝐻𝑡 ∈ [0,1],

where 𝑉 is continuously (at least) a twice differentiable function; 𝛼 ∈ [0,1],

𝐷 ∈ (0, ∞), and 𝛽 ∈ [0,1] are given parameters; (𝐶𝑡 , 𝐼𝑡 ) is a convex set on ℝ2≥0 ;

5
𝐻𝑡 ∈ [0,1] is a convex set; and 𝑍𝑡 is a convex set on ℝ+ and is given together with

𝑃𝐶,𝑡 , 𝑃𝐼,𝑡 ∈ (0, ∞).

The economic interpretations of the above variables are as follows: 𝑉 represents

the utility function of the consumer (in the above case, we assume the Cobb–Douglas

utility function); 𝐶𝑡 is consumption at period 𝑡; 𝐻𝑡 is leisure at period 𝑡; 𝐼𝑡 is

investment at period 𝑡; 𝑌𝑡 is production at period 𝑡; 𝑍𝑡 is productivity at period 𝑡;

𝑃𝐶,𝑡 is the real price of consumption (goods) at period 𝑡 (standardized by the price of

production [goods]); and 𝑃𝐼,𝑡 is the real price of investment (goods) at period 𝑡 (also

standardized by the price of production [goods]).

In this standard model, the consumer obtains positive utility from consumption

and leisure and experiences a trade-off between consumption 𝐶𝑡 and leisure 𝐻𝑡 . When

both consumption 𝐶𝑡 and leisure 𝐻𝑡 in this standard model double simultaneously, the

consumer’s utility also doubles. However, the increase of marginal utility gradually

decreases if only consumption or leisure increases.

Additionally, because this standard model is the representative consumer model in

which all individual consumers are identical, there is no need to treat each consumer

separately, such as consumer 𝑗, for all the variables in the model including production

𝑌𝑡 , consumption 𝐶𝑡 , investment 𝐼𝑡 , and leisure 𝐻𝑡 . Therefore, although we assume

6
there are 𝑁 consumers in our model, we do not explicitly use the subscript 𝑗 to

indicate the individual variables our model uses unlike Heterogeneity section.

The productivity 𝑍𝑡 , investment 𝐼𝑡 , and labor input 1 − 𝐻𝑡 determine the

production 𝑌𝑡 . When the investment 𝐼𝑡 and labor input 1 − 𝐻𝑡 double, the production

𝑌𝑡 also doubles. However, if only one of the production factors (investment or labor

input) increases, the production 𝑌𝑡 increases, but each input’s increase of marginal

productivity gradually decreases.

In addition, if the real prices 𝑃𝐶,𝑡 , and 𝑃𝐼,𝑡 are assumed to be one (i.e., the same

price as that of the production goods 𝑌𝑡 ) respectively, the resource constraint 𝑌𝑡 ≥

𝑃𝐶,𝑡 𝐶𝑡 + 𝑃𝐼,𝑡 𝐼𝑡 is reduced to be the same as the standard constraint used in

macroeconomics. In this paper, following the tradition of mathematical (micro)

economics dealing with multi-goods models, we assume that the goods baskets are

different between consumption and investment, and therefore the real price 𝑃𝐶,𝑡 is

naturally different from 𝑃𝐼,𝑡 . The deflators for consumption 𝐶𝑡 and investment 𝐼𝑡 are

treated separately in National Accounts, which we consider to be a natural formulation,

although this formulation is different from the traditional macroeconomic modeling.

Unlike the standard macroeconomic models, our social planner problem does not

explicitly deal with the firm’s profit maximization problem. However, if we make the

7
perfect competition assumption, under the firm’s profit maximization assumption, the

production 𝑌𝑡 is attributed and distributed to all the optimal quantities of production

factors 𝐼𝑡 and 1 − 𝐻𝑡 and thus satisfies one of the constraints of the above social

planner problem with equality, 𝑌𝑡 = 𝑃𝐶,𝑡 𝐶𝑡 + 𝑃𝐼,𝑡 𝐼𝑡 as the firm’s profit maximization

problem will do, which is similar to the consumer’s budget constraint.

In this paper, we focus on the relationship between consumer demand and

production. Therefore, we follow Kiley (2003) and effectively use his formulation that

explicitly omits the firm’s profit maximization problem.

Now, solving this standard model with the Karush-Kuhn-Tucker theorem, we

obtain the following equations:

(the Interior Solution)

if 𝐻𝑡 ∈ (0,1),

𝛽 1 −𝛽
(1−𝛽)𝑌𝑡 𝛽𝑌𝑡
𝐶𝑡 = , 𝐼𝑡 = 𝑃 , 𝑌𝑡 = 𝛽 1−𝛽 1−𝛽
𝑍𝑡 1−𝛽
̅.
𝑃𝐼,𝑡 (1 − 𝐻𝑡 ), 𝐻𝑡 = 1 − 𝛼 = 𝐻
𝑃𝐶,𝑡 𝐼,𝑡

(the Corner Solutions)

(i) 𝐶𝑡 = 0, 𝐼𝑡 = 0, 𝑌𝑡 = 0, if 𝐻𝑡 = 1.

𝛽 1 −𝛽
(1−𝛽)𝑌𝑡 𝛽𝑌𝑡 1−𝛽 1−𝛽
(ii) 𝐶𝑡 = , 𝐼𝑡 = 𝑃 , 𝑌𝑡 = 𝛽 1−𝛽 𝑍𝑡 𝑃𝐼,𝑡 , if 𝐻𝑡 = 0.
𝑃𝐶,𝑡 𝐼,𝑡

In this standard model, if the optimum is interior, consumption 𝐶𝑡 and

investment 𝐼𝑡 , depending on the real prices 𝑃𝐶,𝑡 , and 𝑃𝐼,𝑡 , are fixed fractions of

8
production 𝑌𝑡 , whereas leisure 𝐻𝑡 is a function of the parameter of the utility function

̅), the exponent of leisure in the utility

𝛼. In other words, leisure 𝐻𝑡 is 1 − 𝛼 ( = 𝐻

function. Leisure 𝐻𝑡 increases only when the exponent for consumption in the utility

function decreases. Additionally, if we consider the corner solutions, these optima are

trivial. However, one corner solution with the fixed leisure at 𝐻𝑡 = 0 mostly maintains

the above equilibrium characteristics.

As we will show later, the above equations of the interior solution and one corner

solution at 𝐻𝑡 = 0 explicitly indicate that consumption 𝐶𝑡 and investment 𝐼𝑡 depend

on 𝑃𝐶,𝑡 , and 𝑃𝐼,𝑡 , the real prices of consumption goods and investment goods. The

demand function is precisely the same as those in microeconomics textbooks such as

that of Nishimura (1990), except that this model is a general equilibrium model that

considers production.

From the above interior analytical solution, we also obtain the relation 𝑌𝑡 =

𝛽 1 −𝛽
1−𝛽 1−𝛽
𝛽 1−𝛽 𝑍𝑡 𝑃𝐼,𝑡 𝛼. Therefore, in this general equilibrium, which also considers changes in

production 𝑌𝑡 , if 𝑃𝐶,𝑡 , the real price of consumption 𝐶𝑡 , rises, consumption 𝐶𝑡 will

decrease, so that utility 𝑉 will decrease. On the other hand, an increase in the real price

𝑃𝐼,𝑡 decreases production 𝑌𝑡 (due to the price effect), which lowers the level of

consumption 𝐶𝑡 , and utility 𝑉 decreases. Conversely, if the real prices 𝑃𝐶,𝑡 and 𝑃𝐼,𝑡

9
decrease, utility 𝑉 increases along the same path. This effect is the price effect in this

standard model and maintained in the interior solution and one corner solution at 𝐻𝑡 =

0.

Note that, unlike the following particular utility function case, we can measure

the welfare effects clearly because the leisure remains constant and only the

consumption affects the utility.

The Modified Social Interaction Model With a Particular Utility Function

Next, we take up our social interaction model, which is based on Becker and

Murphy (2000), but we add the production function. Considering a symmetric

equilibrium in which all 𝑁 consumers are homogeneous, the particular utility function

𝑈 in our social interaction model with production is expressed as follows:

𝑈(𝐶𝑡 , 𝐻𝑡 ) = 𝐴𝐶𝑡 + 𝐵𝐻𝑡 + 𝐷𝐶𝑡𝛼 𝐻𝑡1−𝛼 ,

where 𝑈 is the (at least twice) continuously differentiable function and 𝐴, 𝐵, 𝐷 ∈

(0, ∞), and 𝛼 ∈ [0,1] are given parameters.

Note that we discuss only the 𝐴, 𝐵 ∈ (0, ∞) case in the following paragraphs and

sections. This is for the convenience of our discussions. we can extend our case into the

more general 𝐴, 𝐵 ∈ (−∞, ∞) case, 𝐴 = 0 case, and 𝐵 = 0 case. We illustrate this

first general case graphically in detail in Appendix B. Regarding the latter two cases,

10
these are the trivial particular cases of our 𝐴, 𝐵 ∈ (0, ∞) and do not explicitly analyze

them in this paper (for these cases, we just set 𝐴 = 0 or 𝐵 = 0 for the following

equations).

The above symmetric equilibrium assumption implies that for every consumer 𝑗

𝑗 𝑗
in a community, 𝐶𝑡 = 𝐶𝑡 , and 𝐻𝑡 = 𝐻𝑡 . Therefore, 𝐴𝐶𝑡 and 𝐵𝐻𝑡 , the linear terms in

the above particular utility function 𝑈, also represent the social capital accumulated

through consumption 𝐶𝑡 and leisure 𝐻𝑡 (i.e., the average consumption and leisure of

all consumers in society). Thus, again, this extension model is also the representative

consumer model.

In this paper, if there are 𝑁 consumers in the whole society, the per capita social

capital 𝐾𝑙,𝑡 , 𝑙 = 1,2 accumulates with the standard per capita capital formation

𝑗
∑𝑁
𝑗=1 𝑥𝑙,𝑡 𝑗 𝑗 𝑗 𝑗
equation 𝐾𝑙,𝑡 = + (1 − 𝛿𝑙 )𝐾𝑙,𝑡−1 , where 𝑥1,𝑡 = 𝐶𝑡 , 𝑥2,𝑡 = 𝐻𝑡 , 𝑡 is time, and
𝑁

𝑙 = 1,2, 𝛿𝑙 denotes the social capital depreciation rate for each good. However, in the

particular case of 𝛿𝑙 = 1, 𝑙 = 1,2, we can reducibly express the variables in the

𝑗
∑𝑁
𝑗=1 𝑥𝑙,𝑡
standard per capita social capital accumulation equation as 𝐾𝑙,𝑡 = .
𝑁

Furthermore, considering the symmetric equilibrium described above, we assume

𝑗 𝑗
that for all consumers 𝑗 in the society, 𝐶𝑡 = 𝐶𝑡 , and 𝐻𝑡 = 𝐻𝑡 again. Thus, by

substituting this relationship into the standard per capita social capital formation

11
equation, we obtain 𝐾1,𝑡 = 𝐶𝑡 , 𝐾2,𝑡 = 𝐻𝑡 , which are expressed in the above linear

terms 𝐴𝐶𝑡 and 𝐵𝐻𝑡 in our particular utility function 𝑈.

Moreover, we note from this result that the linear terms 𝐴𝐶𝑡 and 𝐵𝐻𝑡 also

generate the relationship that as social capital increases, consumer utility also increases.

Although Becker and Murphy (2000) initially assume the existence of social capital

such as a religion, their model can also represent the broader social capital, such as

community and connections created by human networks (both of the above two points

are owed to Professor Kuniyoshi Saito’s suggestions). For this particular case in which

we fully amortize social capital each period, these linear terms represent the effect of

social capital created by the connections among community members.

Finally, our model also represents the network externality defined by Egashira et

al. (1995), given Egashira et al.’s (1995) definition that “‘Network externality’ refers to

the case in which an individual’s utility from the demand for a good or service depends

not only on the use-value of the good or service itself but also on the extent to which

others demand the same good” (translated by author. This point is also owed to

Professor Kuniyoshi Saito’s suggestions).

The characteristics of this particular utility function 𝑈 are the additional linear

terms about consumption 𝐶𝑡 and leisure 𝐻𝑡 (the terms that generate the social

12
multiplier) to the utility function 𝑉 of the previous standard model. In other words,

consumers have linear terms in which their utility always increases in a fixed ratio as

the average consumption and leisure of other consumers (i.e., their own consumption

and leisure from the symmetry assumption) in society increases, as long as 𝐴 and 𝐵

are positive.

Therefore, the marginal utilities from the two goods, consumption 𝐶𝑡 and leisure

𝐻𝑡 , in our model are more significant than in the previous model. However, the second-

order differentiation of this utility function will be the same as in the previous model.

The decreasing degree of the marginal utility of the particular utility function 𝑈 is the

same as that of the standard utility function 𝑉.

Using this particular utility function 𝑈, subject to the same constraints as for the

previous individual maximization problem when using the standard utility function 𝑉,

we solve this maximization problem using the Karush-Kuhn-Tucker theorem and obtain

the following four equations for the interior solution:

𝛽 1 −𝛽
(1−𝛽)𝑌𝑡 𝛽𝑌𝑡 1−𝛽 1−𝛽
𝐶𝑡 = , 𝐼𝑡 = 𝑃 , 𝑌𝑡 = 𝛽 1−𝛽 𝑍𝑡 𝑃𝐼,𝑡 (1 − 𝐻𝑡 ), if 𝐻𝑡 ∈ (0,1).
𝑃𝐶,𝑡 𝐼,𝑡

Because the leisure 𝐻𝑡 is a complex nonlinear function, the linear approximation

̅
𝐻
of this function around 𝑋 = 1−𝐻̅ is

13
 1−𝛼 1−𝐺𝑡 𝑋𝛼
̅ 1−𝛼−𝛼𝑋−𝐺𝑡 𝑋 𝛼 ∙
𝐻𝑡 𝐻 𝛼 1+𝐺𝑡 𝑋𝛼−1
− 1−𝐻̅ = 𝑋𝑡 − 𝑋 ≅ , ∴ 𝐻𝑡 = 1−𝛼 1−𝐺𝑡 𝑋𝛼
,
1−𝐻𝑡 𝛼+𝛼𝐺𝑡 𝑋 𝛼−1 1+ ∙
𝛼 1+𝐺𝑡 𝑋𝛼−1

𝛽(𝛼−1) 𝛼𝛽
𝛼−1 𝛼 1−𝛽
where 𝐺𝑡 = 𝐴𝐺1,𝑡 𝑃𝐶,𝑡 𝑃𝐼,𝑡1−𝛽 − 𝐵𝐺2,𝑡 𝑃𝐶,𝑡 𝑃𝐼,𝑡 , 𝐺1,𝑡 = 𝐷−1 (1 −
𝛽(1−𝛼) 1−𝛼 −𝛼𝛽 −𝛼

𝛽)1−𝛼 𝛽 1−𝛽 𝑍𝑡1−𝛽 , 𝐺2,𝑡 = 𝐷−1 (1 − 𝛽)−𝛼 𝛽 1−𝛽 𝑍𝑡1−𝛽 .

Moreover, the corner solutions are obtained in a manner similar to the former

problem:

(the Corner Solutions)

(i) 𝐶𝑡 = 0, 𝐼𝑡 = 0, 𝑌𝑡 = 0, if 𝐻𝑡 = 1.

𝛽 1 −𝛽
(1−𝛽)𝑌𝑡 𝛽𝑌𝑡 1−𝛽 1−𝛽
(ii) 𝐶𝑡 = , 𝐼𝑡 = 𝑃 , 𝑌𝑡 = 𝛽 1−𝛽 𝑍𝑡 𝑃𝐼,𝑡 , if 𝐻𝑡 = 0.
𝑃𝐶,𝑡 𝐼,𝑡

For the interior solution, this leisure 𝐻𝑡 can be interpreted in various ways

𝜕𝑋𝑡
depending on the size of the given parameters. However, we know that > 0. When
𝜕𝐻𝑡

parameter 𝐴 is more significant than parameter 𝐵, the right-hand side of the above

̅ . However, if
approximation equation is always negative, and 𝐻𝑡 is always less than 𝐻

𝐴 becomes much more significant than 𝐵, 𝐻𝑡 mostly become the corner solutions.

Furthermore, depending on the size of 𝛼, 𝐻𝑡 could be more significant or smaller than

̅ . In such a case, the behavior of 𝐻𝑡 is uncertain.

𝐻

On the other hand, if we set 𝐴 as relatively smaller than 𝐵, then 𝐻𝑡 is always

̅ . However, when 𝐵 becomes relatively too large, depending on

more significant than 𝐻

the size of 𝛼, 𝐻𝑡 mostly becomes the corner solutions. Similarly, depending on the

14
 ̅ . In such a case, the behavior
size of 𝛼, 𝐻𝑡 might be more significant or smaller than 𝐻

of 𝐻𝑡 is uncertain. Note that in this paper, we assume that 𝐷, 𝛽, and other variables

such as 𝑃𝐶,𝑡 , 𝑃𝐼,𝑡 , and 𝑍𝑡 are constant.

Simply put, leisure will always decrease when the preference for consumption

based on a horizontal consciousness is higher than that for leisure to some extent.

Moreover, when the preference for consumption based on a horizontal consciousness is

much higher than that for leisure, leisure could become the corner solutions. In this

case, the movement of leisure becomes uncertain, depending on the size of 𝛼.

On the other hand, if the preference for leisure from a horizontal consciousness is

higher than that for consumption to some extent, leisure will always increase. However,

if the preference for leisure from a horizontal consciousness becomes much higher than

that for consumption, leisure might become the corner solutions. In this case, the

movement of leisure becomes uncertain, depending on the size of 𝛼.

The above discussion can be visually confirmed as follows. Figure 1 and 2 show

the MATLAB simulation results. Again, the right-hand side of the above equation for

𝑋𝑡 − 𝑋 is a complex nonlinear expression for 𝐴 and 𝐵. The behavior of this equation

depends on the size of 𝛼.

Figure 1

15
 ̅ Under 𝐴 = 0.001 and 𝐵 = 0.05 With the Variation of
Changes in 𝑋𝑡 − 𝑋, 𝐻𝑡 , and 𝐻

Figure 2

̅ Under 𝐴 = 0.0001 and 𝐵 = 7.0 With the Variation of

Changes in 𝑋𝑡 − 𝑋, 𝐻𝑡 , and 𝐻

16
 ̅ under 𝐴 = 0.001
Figures 1 and 2 show the effect of 𝛼 on 𝑋𝑡 − 𝑋, 𝐻𝑡 , and 𝐻

and 𝐵 = 0.05 and under 𝐴 = 0.0001 and 𝐵 = 7.0, respectively. The left graphs show

𝑋𝑡 − 𝑋 on the vertical axis, with the given value of 𝛼 on the horizontal axis varying

̅ on the vertical axis,

from 0.00 to 1.00. Furthermore, the right graphs show 𝐻𝑡 and 𝐻

with the given value of 𝛼 on the horizontal axis varying from 0.00 to 1.00. For other

variables and parameters, it is assumed that 𝑃𝐶,𝑡 , 𝑃𝐼,𝑡 , 𝐷 = 1, 𝑍𝑡 = 150, and 𝛽 = 0.3

for convenience. In this paper, all the assumed parameters are not rigorously based on

any empirical analysis but are chosen to illustrate the characteristics of our model

behavior clearly. Note that the effects of 𝐴 and 𝐵 on the simulation results are

17
asymmetric. In these parameter cases, the economic interpretations of the change in the

parameter 𝛼 and the corresponding changes in 𝑋𝑡 − 𝑋 and 𝐻𝑡 are straightforward.

In this paper, we do not show the figure in the case that 𝐴 or 𝐵, or both are too

large. In the case where 𝐵 is too large, the monotonicity of the unilateral increase or

decrease of 𝑋𝑡 − 𝑋 concerning the value of 𝛼, which is visible in the left graphs of

Figures 1 and 2, is no longer observed. Furthermore, in this case, 𝑋𝑡 − 𝑋 might appear

in both positive and negative regions and fluctuate greatly, and 𝐻𝑡 mostly shows the

corner solution such as 𝐻𝑡 = 1 (in the case where 𝐵 is far too large, 𝐻𝑡 mostly takes

the corner solutions). In this way, the left graph of figure in this case also shows some

spikes and is challenging to interpret economically. If 𝐴 is too large, 𝐻𝑡 is mostly on

the corners and similarly takes one corner solution or the other.

Note that the behaviors of 𝑋𝑡 − 𝑋 and 𝐻𝑡 in the case where 𝐴 and 𝐵 are too

large are similar to that in the case where 𝐴 is too large given other parameters as

shown, although dependent on the relative sizes of 𝐴 and 𝐵 because the effects of

parameters 𝐴 and 𝐵 are mutually adverse.

Additionally, the above results are based on the assumption that 𝐴 and 𝐵 are

positive. we show the cases where 𝐴 or 𝐵, or both are negative in Appendix B. My

results indicate that with negative 𝐴 or 𝐵, or both, the characteristic of behavior of 𝐻𝑡

18
are unchanged (though the behavior of 𝑋𝑡 − 𝑋 does not show any spikes different from

the above). Again, the above parameter settings are not natural and not supported by

empirical analyses. We take up these parameters only to illustrate our model behavior.

To summarize, the relationships between positive 𝐴 or 𝐵 and 𝛼 determine the

behaviors of 𝑋𝑡 − 𝑋 and 𝐻𝑡 , but as shown in Figures 1 and 2, 𝐻𝑡 nonlinearly depends

̅ linearly (as shown in Appendix B, this

on 𝐴 or 𝐵 and 𝛼, although 𝛼 moves 𝐻

relationship is maintained in the region of negative parameter 𝐴 or 𝐵). If 𝐴 or 𝐵 is

too large, with 𝛼 being constant, it results in being much more significant or smaller

̅ ) and makes 𝐻𝑡 take the corner solutions mostly. Additionally, as

than 1 − 𝛼 (= 𝐻

Figures 1 and 2 show, the parameter 𝐴 or 𝐵 affects the behavior of 𝐻𝑡 inversely, so

in the case where 𝐴 and 𝐵 are too large, the effect of 𝐴 might usually dominate that

of 𝐵. Note that in these simulations and those in Appendix B, we exclude the 𝛼 = 0

case because we cannot define this case to divide the numerator by zero.

Social Multiplier Effect

In this section, we show the social multiplier effect, as discussed by Becker and

Murphy (2000), with this paper’s simple general equilibrium model without physical

capital accumulation. First, the interior solution for the original utility function 𝑉

without a horizontal consciousness is restated as

19
 𝛽 1 −𝛽
(1−𝛽)𝑌𝑡 𝛽𝑌
𝐶𝑡 = , 𝐼𝑡 = 𝑃 𝑡, 𝑌𝑡 = 𝛽 1−𝛽 𝑍𝑡1−𝛽 𝑃𝐼,𝑡
1−𝛽
̅.
(1 − 𝐻𝑡 ), 𝐻𝑡 = 1 − 𝛼 = 𝐻
𝑃𝐶,𝑡 𝐼,𝑡

In this case, it is evident that the price 𝑃𝐶,𝑡 , and the price 𝑃𝐼,𝑡 only have direct

effects on the demands for consumption 𝐶𝑡 and investment 𝐼𝑡 , respectively, and are not

different from the standard demand functions, as shown in numerous microeconomics

textbooks (e.g., Nishimura, 1990).

However, the interior solution in our particular utility function 𝑈 discussed in

this paper, which includes a horizontal consciousness, is as follows:

𝛽 1 −𝛽
1−𝛽 1−𝛽
𝐶𝑡 = (1 − 𝛽)𝑌𝑡 /𝑃𝐶,𝑡 , 𝐼𝑡 = 𝛽 𝑌𝑡 /𝑃𝐼,𝑡 , 𝑌𝑡 = 𝛽 1−𝛽 𝑍𝑡 𝑃𝐼,𝑡 (1 − 𝐻𝑡 ),

1−𝛼 1−𝐺𝑡 𝑋 𝛼 1−𝛼 1−𝐺𝑡 𝑋 𝛼

𝐻𝑡 = /(1 + ),
𝛼 1+𝐺 𝑋 𝛼−1
𝑡 𝛼 1+𝐺𝑡 𝑋 𝛼−1

𝛽(𝛼−1) 𝛼𝛽
𝛼−1 𝛼 1−𝛽
where 𝐺𝑡 = 𝐴𝐺1,𝑡 𝑃𝐶,𝑡 𝑃𝐼,𝑡1−𝛽 − 𝐵𝐺2,𝑡 𝑃𝐶,𝑡 𝑃𝐼,𝑡 , 𝐺1,𝑡 = 𝐷−1 (1 −
𝛽(1−𝛼) 1−𝛼 −𝛼𝛽 −𝛼
1−𝛼 1−𝛽 −1 −𝛼 1−𝛽
𝛽) 𝛽 1−𝛽 𝑍𝑡 , 𝐺2,𝑡 = 𝐷 (1 − 𝛽) 𝛽 1−𝛽 𝑍𝑡 .

From the above, it is clear that under the particular utility function 𝑈 with the

social multiplier effect, the real price 𝑃𝐶,𝑡 and the real price 𝑃𝐼,𝑡 affect leisure 𝐻𝑡 , that

is, working hours 1 − 𝐻𝑡 , and through this effect, the above first two solutions about

consumption 𝐶𝑡 and investment 𝐼𝑡 will show more reduction than shown in the

previous standard model because 𝐴 and 𝐵 are assumed to be positive. The above

effect is called the social multiplier effect in the general equilibrium view (the partial

equilibrium analysis is given in Becker & Murphy, 2000).

20
 Looking more mathematically in depth, the real price 𝑃𝐶,𝑡 and the real price 𝑃𝐼,𝑡

affect consumption 𝐶𝑡 and investment 𝐼𝑡 as follows:

1 𝛽 −𝛽
1−𝛽 1−𝛽 1−𝛽 1 𝛽 −𝛽
𝜕𝐶𝑡 𝜕[(1−𝛽)𝑍𝑡 𝛽 𝑃𝐼,𝑡 (1−𝐻𝑡 )/𝑃𝐶,𝑡 ] −1 𝜕𝐻
= = (1 − 𝛽)𝑍𝑡1−𝛽 𝛽 1−𝛽 𝑃𝐼,𝑡
1−𝛽
[− 𝜕𝑃 𝑡 𝑃𝐶,𝑡 − (1 −
𝜕𝑃𝐶,𝑡 𝜕𝑃𝐶,𝑡 𝐶,𝑡

−2
𝐻𝑡 )𝑃𝐶,𝑡 ] < 0,
𝜕𝐺 𝜕𝐺
− 𝑡 𝑋 𝛼 (1+𝐺𝑡 𝑋 𝛼−1 )−(1−𝐺𝑡 𝑋 𝛼 ) 𝑡 𝑋 𝛼−1
𝜕𝐻𝑡 1 1−𝛼 𝜕𝑃𝐶,𝑡 𝜕𝑃𝐶,𝑡
∵ 𝜕𝑃 = 2 𝛼−1 2 > 0,
𝐶,𝑡 (1+𝐺𝑇𝑡 ) 𝛼 (1+𝐺𝑡 𝑋 )

1−𝛼 1−𝐺𝑡 𝑋 𝛼
where 𝐺𝑇𝑡 = ,
𝛼 1+𝐺𝑡 𝑋 𝛼−1

𝛽(𝛼−1) 𝛼𝛽
𝜕𝐺𝑡 𝛼−2 𝛼−1 1−𝛽
= (𝛼 − 1)𝐴𝐺1,𝑡 𝑃𝐶,𝑡 𝑃𝐼,𝑡1−𝛽 − 𝛼𝐵𝐺2,𝑡 𝑃𝐶,𝑡 𝑃𝐼,𝑡 < 0, 1 − 𝐺𝑡 𝑋 𝛼 > 0.
𝜕𝑃𝐶,𝑡
1 𝛽 −1
1−𝛽 1−𝛽 1−𝛽
𝜕[𝛽𝑍𝑡 𝛽 𝑃𝐼,𝑡 (1−𝐻𝑡 )] 1 𝛽 −1 −1
𝜕𝐼𝑡 𝜕𝐻𝑡 1 −1
1−𝛽 1−𝛽 1−𝛽
= = 𝛽𝑍𝑡 𝛽 1−𝛽 [− 𝜕𝑃 𝑃𝐼,𝑡 − 1−𝛽 (1 − 𝐻𝑡 )𝑃𝐼,𝑡 ] < 0,
𝜕𝑃𝐼,𝑡 𝜕𝑃𝐼,𝑡 𝐼,𝑡

𝜕𝐺 𝜕𝐺
− 𝑡 𝑋 𝛼 (1+𝐺𝑡 𝑋 𝛼−1 )−(1−𝐺𝑡 𝑋 𝛼 ) 𝑡 𝑋 𝛼−1
𝜕𝐻𝑡 1 1−𝛼 𝜕𝑃𝐼,𝑡 𝜕𝑃𝐼,𝑡
∵ 𝜕𝑃 = (1+𝐺𝑇 )2 > 0,
𝐼,𝑡 𝑡 𝛼 (1+𝐺𝑡 𝑋 𝛼−1 )2

1−𝛼 1−𝐺𝑋 𝛼
where 𝐺𝑇𝑡 = ,
𝛼 1+𝐺𝑋 𝛼−1
𝛽𝛼−1 𝛼𝛽
𝜕𝐺𝑡 𝛽(𝛼−1) 𝛼𝛽 −1
𝛼−1 1−𝛽 𝛼 1−𝛽
= 𝐴𝐺1,𝑡 𝑃𝐶,𝑡 𝑃𝐼,𝑡 − 𝐵𝐺2,𝑡 𝑃𝐶,𝑡 𝑃𝐼,𝑡 < 0.
𝜕𝑃𝐼,𝑡 1−𝛽 1−𝛽

In short, when the real prices 𝑃𝐶,𝑡 and 𝑃𝐼,𝑡 increase, leisure 𝐻𝑡 always

increases, consumption 𝐶𝑡 decreases, and the direction of utility 𝑈 is uncertain unlike

the standard utility 𝑉 case. To be more precise, if we mathematically compare these

price effects with those in the original utility function 𝑉 in detail, the price effects are

−1 𝜕𝐻 𝜕𝐶𝑡
amplified by the − 𝜕𝑃 𝑡 𝑃𝐶,𝑡 term on the right-hand side of in the case of a
𝐶,𝑡 𝜕𝑃𝐶,𝑡

−1
1−𝛽 𝜕𝐻
change in the real price 𝑃𝐶,𝑡 , and by the − 𝜕𝑃 𝑡 𝑃𝐼,𝑡 term on the right-hand side of
𝐼,𝑡

21
𝜕𝐼𝑡
in the case of a change in the real price 𝑃𝐼,𝑡 . Additionally, through those terms,
𝜕𝑃𝐼,𝑡

leisure 𝐻𝑡 is affected by prices 𝑃𝐶,𝑡 and 𝑃𝐼,𝑡 . These are the social multiplier effects.

In short, we can see that under a particular utility function 𝑈 with a horizontal

consciousness, in addition to the direct effect of the original utility function 𝑉 on the

amount of demand for consumption 𝐶𝑡 and investment 𝐼𝑡 , price 𝑃𝐶,𝑡 and price 𝑃𝐼,𝑡

induce an indirect effect that includes the so-called social multiplier in which prices

affect working hours 1 − 𝐻𝑡 through parameters such as 𝐴 and 𝐵 that indicate the

existence of horizontal consciousness. This is because working hours determine the

level of production 𝑌𝑡 , and this level of production 𝑌𝑡 will further affect consumption

𝐶𝑡 and investment 𝐼𝑡 .

Regarding the point that the prices affect leisure, this result is different from the

case of original utility function 𝑉 without the social multiplier effect. Note that,

different from Brock and Durlauf (1995), we cannot make definitive statements about

the welfare analysis of the price effects between the standard model and its extension,

that is, our social interaction model with production. This is because in our particular

utility function case, these price effects affect the utility, unlike in the standard utility

function 𝑉 case, where the leisure is always constant such that these price effects

complexly depend on the particular parameter settings. Furthermore, no empirical

22
information about them exists. For the same reason, we cannot infer and compare the

(concrete) magnitudes of the social multipliers themselves, different from Brock and

Durlauf (1995).

In summary, the existence of this social multiplier is rooted in the different setting

and equilibrium from those of the standard consumer model of mathematical economics

described by Nishimura (1990) and other numerous studies in the literature that when

prices change, the quantity demanded by other consumers has no effect on the quantity

demanded by respective individual consumers. In our model, like that of Becker and

Murphy (2000), when the price changes, the quantity demanded by the average member

of the community to which the consumer belongs will also affect the quantity demanded

by the respective individual consumer.

Note that the corner solution cases do not admit the social multiplier effects

because the leisure and working hours are fixed at the corners of their domains and are

not affected by prices.

The Guarantee of the Unique Optimum in Our Social Interaction Model With

Production

Our additional assumption is that each of the arguments in our model with a

particular utility function 𝑈 has a non-empty set. Then, the domain of arguments in the

23
(at least twice) continuously differentiable function 𝑈 also becomes convex from the

previous assumptions. Furthermore, the combined resource constraint by the two

constraints shown in A Particular Utility Function for the Social Interaction Model With

Production section form a kind of implicit function about the arguments of the utility

function 𝑈. We get the implicit function for our constraints after an easy

transformation. This is because we use the Karush-Kuhn-Tucker condition to obtain the

optimum of this utility maximization problem.

Second, the above particular utility function 𝑈 satisfies the following definition

in Sundaram (1996) and Osborne (2022) for the strict quasi-concavity: 𝑈[𝜆𝐶𝑡′ +

(1 − 𝜆)𝐶𝑡′′ , 𝜆𝐻𝑡′ + (1 − 𝜆)𝐻𝑡′′ ] = 𝐴[𝜆𝐶𝑡′ + (1 − 𝜆)𝐶𝑡′′ ] + 𝐵[𝜆𝐻𝑡′ + (1 − 𝜆)𝐻𝑡′′ ] +

∀
𝐷[𝜆𝐶𝑡′ + (1 − 𝜆)𝐶𝑡′′ ]𝛼 [𝜆𝐻𝑡′ + (1 − 𝜆)𝐻𝑡′′ ]1−𝛼 > min[𝑈(𝐶𝑡′ , 𝐻𝑡′ ), 𝑈(𝐶𝑡′′ , 𝐻𝑡′′ )] for 𝜆∈

(0,1) given any 𝐶𝑡′ ∈ ℝ≥0 , any 𝐻𝑡′ ∈ [0,1] and any 𝐶𝑡′′ ∈ ℝ≥0 , any 𝐻𝑡′′ ∈ [0,1] and

𝐶𝑡′ , 𝐻𝑡′ , 𝐶𝑡′′ , and 𝐻𝑡′′ are different because any pair (𝐶𝑡 , 𝐻𝑡 ) is the convex set in real

spaces, and our utility function has positive first-order derivatives and negative second-

order derivatives. Additionally, using MAXIMA, we can show the necessary and

sufficient conditions of the alternate signs of the bordered Hessian for quasi-concavity

(e.g., Osborne, 2022), and this utility function is monotonically increasing (e.g., Fuente,

2000). Thus, this particular utility function 𝑈 is a strictly quasi-concave function.

24
 As Dixit (1990), Sundaram (1996), and Jehle and Reny (2001) suggested, the

Karush-Kuhn-Tucker theorem we adopt in this paper requires an additional condition

called a constraint qualification for confirming the optima. The additional condition is

that all three partial derivatives of the resource constraint are not zero. Our constrained

maximization problem in the social interaction model with production satisfies this

requirement.

In terms of concave programming, the purpose of our constrained maximization

problem is to maximize the strictly quasi-concave objective function with the quasi-

concave constraints such that it has a unique optimum (see Theorem 1.20 in Fuente,

2000).

The quasi-concavity of our constraints is proven as follows: Representing our

𝛽
constraint as 𝑅(𝑟𝑡 ) = 𝑍𝑡 𝐼𝑡 (1 − 𝐻𝑡 )1−𝛽 − 𝑃𝐶,𝑡 𝐶𝑡 − 𝑃𝐼,𝑡 𝐼𝑡 ≥ 0, where 𝑟𝑡 = (𝐶𝑡 , 𝐻𝑡 , 𝐼𝑡 ),

and using the definitions for quasi-concavity in Sundaram (1996) and Osborne (2022),

we ensure the necessary condition of the alternate signs of the bordered Hessian for

quasi-concavity with the nonnegativity and nonpositivity. However, we do not ensure

the sufficient condition, such as negativity and positivity, using MAXIMA.

Then, we take up any 𝑠𝑡 = (𝐶𝑡′ , 𝐻𝑡′ , 𝐼𝑡′ ) and 𝑞𝑡 = (𝐶𝑡′′ , 𝐻𝑡′′ , 𝐼𝑡′′ ) vectors within

∀
their domains and 𝜃 ∈ (0,1) such that we have 𝑅[𝜃𝑠𝑡 + (1 − 𝜃)𝑞𝑡 ] = 𝑍𝑡 [𝜃𝐼𝑡′ +

25
(1 − 𝜃)𝐼𝑡′′ ]𝛽 {1 − [𝜃𝐻𝑡′ + (1 − 𝜃)𝐻𝑡′′ ]}1−𝛽 − 𝑃𝐶,𝑡 [𝜃𝐶𝑡′ + (1 − 𝜃)𝐶𝑡′′ ] − 𝑃𝐼,𝑡 [𝜃𝐼𝑡′ +

(1 − 𝜃)𝐼𝑡′′ ] ≥ min[𝑅(𝑝𝑡 ), 𝑅(𝑞𝑡 )], because 𝑠𝑡 = (𝐶𝑡′ , 𝐻𝑡′ , 𝐼𝑡′ ) and 𝑞𝑡 = (𝐶𝑡′′ , 𝐻𝑡′′ , 𝐼𝑡′′ )

vectors are convex sets in the nonnegative domains of real spaces from our previous

assumptions, and the first-order derivatives of our production function are positive and

second-order derivatives are negative. Note that we do not have strict inequality in the

above, different from our previous utility function 𝑈 case, because we might have the

case 𝑅(𝑠𝑡 ) = 𝑅(𝑞𝑡 ).

̌𝑡 and 𝐼̌𝑡 for leisure and

The proof for this is as follows: Take some value 𝐻

investment in their domains, and set 𝛽, 𝑃𝐶,𝑡 , 𝑃𝐼,𝑡 , and 𝑍𝑡 = 𝑍̅ to be constant as usual.

Because it is tedious to think of complicated figures, they are set only for simplicity and

the following numerical example; their values themselves have no substantial meaning

for this proof. Let 𝐶̌𝑡 be a certain consumption under the condition 𝐶̌𝑡 ≤ 𝑌̌𝑡 − 𝐼̌𝑡 . To

𝛽
keep 𝑌̌𝑡 (= 𝐼̌𝑡 [1 − 𝐻
̌𝑡 ]1−𝛽 ≥ 𝐶̌𝑡 + 𝐼̌𝑡 ) unchanged, make 𝐻
̌𝑡 slightly smaller than

̿𝑡 and 𝐼̌𝑡 slightly more significant than before to be equal to 𝐼𝑡̿ .

before to be equal to 𝐻

After that, we take this new 𝐼𝑡̿ and set 𝐶𝑡̿ ≤ 𝑌̌𝑡 − 𝐼𝑡̿ appropriately, where 𝑌̌𝑡 =

𝛽 ̌𝑡 )1−𝛽 = 𝑍̅𝐼𝑡𝛽̿ (1 − 𝐻
𝑍̅𝐼̌𝑡 (1 − 𝐻 ̿𝑡 )1−𝛽 = 𝑌̿𝑡 . Therefore, the value of 𝑅(𝐶𝑡̿ , 𝐻
̿𝑡 , 𝐼𝑡̿ ) can

remain unchanged from 𝑅(𝐶̌𝑡 , 𝐻

̌𝑡 , 𝐼̌𝑡 ), even if 𝐶𝑡̿ , 𝐻
̿𝑡 , 𝐼𝑡̿ , 𝐶̌𝑡 , 𝐻
̌𝑡 , and 𝐼̌𝑡 are all

different. In other words, 𝑅(𝐶𝑡̿ , 𝐻

̿𝑡 , 𝐼𝑡̿ ) = 𝑅(𝐶̌𝑡 , 𝐻
̌𝑡 , 𝐼̌𝑡 ) ≥ 0 can hold, making it quasi-

26
concave (but not strict quasi-concave).

This is our proof but is too abstract. Therefore, for example, we can demonstrate

this proof with a numerical calculation (EXCEL was used with the goal-seeking

function). First, our case is sensitive to decimal numbers in a rigorous sense, but our

conclusions are not essentially changed if we ignore these decimal numbers. Therefore,

we round off the following figures in our calculations to three decimal places: Assume

that 𝛽 = 0.300, 𝑃𝐶,𝑡 = 𝑃𝐼,𝑡 = 1.000, and 𝑍̅ = 150.000. Let 𝐻

̌𝑡 = 0.250, 𝐼̌𝑡 = 140.000,

̿𝑡 = 0.333, and 𝐼𝑡̿ = 184.068. Then, we have 𝑌̌𝑡 = 540.098 = 𝑌̿𝑡 . In this case, we can
𝐻

have 𝑅(𝐶̌𝑡 , 𝐻
̌𝑡 , 𝐼̌𝑡 ) = 𝑅(𝐶𝑡̿ , 𝐻
̿𝑡 , 𝐼𝑡̿ ) with 𝐶̌𝑡 = 400.098 ≠ 356.030 = 𝐶𝑡̿ .

Additionally, for the other inequality constraint 𝐻𝑡 ≤ 1, we can safely assume the

concavity—that is, (implied) quasi-concavity—and we initially assume 𝐻𝑡 ∈ [0,1],

which is the convex domain (e.g., Sundaram, 1996).

Note that in the next section regarding the heterogeneity, we denote our variables

(𝐶𝑡 , 𝐻𝑡 , 𝐼𝑡 ) by adding the right-upper subscript 𝑗 and should modify our discussions in

the above particular utility function and two inequalities for the strict quasi-concavity

and quasi-concavity. However, in these cases, without the other inequality constraint

𝑗
𝐻𝑡 ≤ 1, which should be 𝐻𝑡 ≤ 1, we should change (𝐶𝑡 , 𝐻𝑡 , 𝐼𝑡 ) in terms of

𝑗 𝑗 𝑗 𝑗 𝑗
(𝐶𝑡 , 𝐻𝑡 , 𝐼𝑡 ) as (E[𝐶𝑡 ], E[𝐻𝑡 ], E[𝐼𝑡 ]) like E(𝐶𝑡 ) = ∑𝑁 𝑁
𝑗=1 𝑝𝑗 𝐶𝑡 , E(𝐼𝑡 ) = ∑𝑗=1 𝑝𝑗 𝐼𝑡 , and

27
 𝑗
E(𝐻𝑡 ) = ∑𝑁
𝑗=1 𝑝𝑗 𝐻𝑡 , where 𝑝𝑗 is the probability based on the stationary distribution

with ∑𝑁
𝑗=1 𝑝𝑗 = 1 that consumer (type) 𝑗 will appear in society (see the next section

for details). This transformation does not change our above arguments at all (consider

𝑗 𝑗
E[𝐶𝑡 ] = ∑𝑁 𝑘
𝑗=1 𝑝𝑗 𝐶𝑡 = 𝑝𝑗 𝐶𝑡 + ∑𝑘≠𝑗 𝑝𝑘 𝐶𝑡 , for example).

From the above result, we can characterize our constraints as quasi-concave.

Again, Fuente (2000) explained that the optimum solution is the global maximum in the

case of the pseudo-concave objective function and quasi-concave constraints in the

Karush-Kuhn-Tucker problem, and strict quasi-concavity implies pseudo-concavity.

Furthermore, the convexities of the feasible set {𝑟𝑡 : 𝑅(𝑟𝑡 ) ≥ 0} where 𝑟𝑡 = (𝐶𝑡 , 𝐻𝑡 , 𝐼𝑡 ),

𝐶𝑡 , 𝐼𝑡 ≥ 0, and 𝐻𝑡 ∈ [0,1] enable us to apply the uniqueness to its global maximum

(Fuente, 2000). In this concave programming view, we can secure our unique optimum

property.

Thus, our constrained optimum with this Karush-Kuhn-Tucker condition is

always the unique global optimum under the particular utility function 𝑈 defined on its

convex domain secured by its strict quasi-concavity and the quasi-concave inequality

constraints, as Fuente (2000) showed. We safely apply the unique global optimum in our

social interaction model with production. This result is different from that of Brock and

Durlauf (1995), who suggested multiple equilibria (Note that the above discussions

28
similarly hold with only 𝐴 = 0 case or only 𝐵 = 0 case).

Heterogeneity

Brock and Durlauf (1995) considered the heterogeneity in their model to

establish multiple equilibria. In our case, we consider the heterogeneity to examine its

(possible) effects on our unique optimum conclusion; for example, suppose that the

parameter 𝐷𝑗 is given randomly with the probability 𝑝𝑗 , which is based on the stationary

distribution with ∑𝑁
𝑗=1 𝑝𝑗 = 1, that consumer (type) 𝑗 will appear in society for each

consumer.

Then, following Ljungqvist and Sargent (2000), our stationary equilibrium

considering such heterogeneity mainly requires solving the consumer’s expected utility

maximization problem together with the static (in our case, innately stationary) setting

for the probability distribution and the market clearing condition in the previous section,

and this optimal solution solves this problem.

Moreover, to solve the consumer’s utility maximization problem under a particular

𝑗 𝑗
utility function 𝑈 , the additional deterministic linear terms 𝐶𝑡 = 𝐶𝑡 and 𝐻𝑡 = 𝐻𝑡

𝑗 𝑗
must be changed into the averaged ones E(𝐶𝑡 ) = ∑𝑁 𝑁
𝑗=1 𝑝𝑗 𝐶𝑡 and E(𝐻𝑡 ) = ∑𝑗=1 𝑝𝑗 𝐻𝑡 .

In these equations, again, 𝑝𝑗 is the probability based on the stationary distribution with

∑𝑁
𝑗=1 𝑝𝑗 = 1 that consumer (type) 𝑗 with 𝐷𝑗 will appear in society. Thus, these

29
alternative linear terms appear in this new expected particular utility function 𝑈 ∗ . The

linear terms in the new expected particular utility function 𝑈 ∗ become the joint averages

of (accumulated) social capitals for every share of heterogeneous consumer (type) in

society (see also Appendix A).

As a result, the new expected utility maximization problem in the social interaction

model with production is described as follows:

𝑗 𝑗 𝑗 𝑗 𝑗 𝑗
max
𝑗 𝑗 𝑗
E[𝑈(𝐶𝑡 , 𝐻𝑡 )] = 𝐴 ∑𝑁 𝑁 𝑁 𝑗 𝛼
𝑗=1 𝑝𝑗 𝐶𝑡 + 𝐵 ∑𝑗=1 𝑝𝑗 𝐻𝑡 + ∑𝑗=1 𝑝𝑗 𝐷 (𝐶𝑡 ) (𝐻𝑡 )
1−𝛼
,
𝐶𝑡 ,𝐻𝑡 ,𝐼𝑡

𝑗 𝑗 𝑗 𝛽
subject to 𝑌𝑡 ≥ 𝑃𝐶,𝑡 ∑𝑁 𝑁 𝑁
𝑗=1 𝑝𝑗 𝐶𝑡 + 𝑃𝐼,𝑡 ∑𝑗=1 𝑝𝑗 𝐼𝑡 , 𝑌𝑡 = 𝑍𝑡 (∑𝑗=1 𝑝𝑗 𝐼𝑡 ) (1 −

𝑗 1−𝛽 𝑗 𝑗 𝑗
∑𝑁
𝑗=1 𝑝𝑗 𝐻𝑡 ) , 𝐶𝑡 , 𝐼𝑡 ≥ 0, 𝐻𝑡 ∈ [0,1],

given 𝐴, 𝐵, 𝐷 𝑗 ∈ (0, ∞), 𝛼 ∈ [0,1], 𝛽 ∈ [0,1], 𝑃𝐶,𝑡 , 𝑃𝐼,𝑡 ∈ (0, ∞), 𝑍𝑡 is a

convex set on ℝ+ , and E is an expectation operator.

In the above problem, we assume that 𝐷 𝑗 is distributed with the probability 𝑝𝑗

𝑗 𝑗
following some stationary distribution and ∑𝑁
𝑗=1 𝑝𝑗 = 1. Note that (𝐶𝑡 , 𝐼𝑡 ) is a convex

𝑗
set on ℝ2≥0 and 𝐻𝑡 ∈ [0,1] is a convex set. Additionally, we know that the expected

𝑗 𝑗
utility function E[𝑈(𝐶𝑡 , 𝐻𝑡 )], the resource constraint, the other equality and inequality

constraints, and the implicit function combined with the above first two constraints are

twice differentiable for the utility function and differentiable for the constraints. We

require this condition for numerical methods such as the interior point method with the

30
second-order Taylor expansion for the particular utility function and Newton’s method

as the solution method, which is usually applied to the Karush-Kuhn-Tucker problem

(e.g., Tamura & Muramatsu, 2002).

For the above constrained expected utility maximization problem, we have the

following first-order conditions, using the multipliers 𝜙 and 𝜇 for the combined

𝑗
implicit inequality constraint and the inequality constraint 𝐻𝑡 ≤ 1 (see, e.g., Dixit,

1990, for the concrete solution method for the Karush-Kuhn-Tucker theorem):

𝑗 𝑗 𝑗
𝐴 + 𝛼𝐷 𝑗 (𝐶𝑡 )𝛼−1 (𝐻𝑡 )1−𝛼 − 𝜙𝑃𝐶,𝑡 ≤ 0, if 𝐶𝑡 ⋝ 0,

𝑗 𝑗 𝑗 𝛽
𝑝𝑗 𝐵 + 𝑝𝑗 (1 − 𝛼)𝐷 𝑗 (𝐶𝑡 )𝛼 (𝐻𝑡 )−𝛼 − 𝑝𝑗 (1 − 𝛽)𝜙𝑍𝑡 (∑𝑁
𝑗=1 𝑝𝑗 𝐼𝑡 ) (1 −

𝑗 −𝛽 𝑗
∑𝑁
𝑗=1 𝑝𝑗 𝐻𝑡 ) − 𝜇 ≤ 0, if 𝐻𝑡 ⋝ 0,

𝑗 𝛽−1 𝑗 𝑗
𝛽𝑍𝑡 (∑𝑁
𝑗=1 𝑝𝑗 𝐼𝑡 ) (1 − ∑𝑁
𝑗=1 𝑝𝑗 𝐻𝑡 )
1−𝛽
− 𝑃𝐼,𝑡 ≤ 0, if 𝐼𝑡 ⋝ 0,

𝑗 𝛽 𝑗 𝑗 𝑗
𝑍𝑡 (∑𝑁 𝑁
𝑗=1 𝑝𝑗 𝐼𝑡 ) (1 − ∑𝑗=1 𝑝𝑗 𝐻𝑡 )
1−𝛽
− 𝑃𝐶,𝑡 ∑𝑁 𝑁
𝑗=1 𝑝𝑗 𝐶𝑡 − 𝑃𝐼,𝑡 ∑𝑗=1 𝑝𝑗 𝐼𝑡 ≥ 0, if

𝜙 ⋝ 0,

𝑗
1 − 𝐻𝑡 ≥ 0, if 𝜇 ⋝ 0.

To solve the above new consumer’s expected utility maximization problem and

satisfy these first-order conditions, we suppose that the optimal solutions are specific

𝑗 𝑗 𝑗
values of consumption 𝐶𝑡 , investment 𝐼𝑡 , and leisure 𝐻𝑡 . Because the probability

density function for the existing heterogeneous types of consumers is objective and

31
 𝑗∗ 𝑗∗ 𝑗∗
stationary from our assumptions, the optimal solution pair (𝐶𝑡 , 𝐻𝑡 , 𝐼𝑡 ) in the

consumer’s expected utility maximization problem should satisfy the market clearing

𝑗 𝑗
condition 𝑌𝑡 = 𝑃𝐶,𝑡 ∑𝑁 𝑁
𝑗=1 𝑝𝑗 𝐶𝑡 + 𝑃𝐼,𝑡 ∑𝑗=1 𝑝𝑗 𝐼𝑡 (i.e., 𝜙 > 0 ) from the definition of

stationary equilibrium.

However, as we easily understand from the above first-order conditions, the new

solution satisfying our stationary equilibrium conditions can only be obtained using

numerical methods, as the representative studies, such as Aiyagari (1994) and Achdou et

al. (2021), suggest (although the latter suggests the analytical solution in the special case).

There are many numerical methods of nonlinear programming; Tamura and Muramatsu

(2002) explained some of them, for example. Furthermore, note that some numerical

methods supply the numerical gradients themselves and do not use the above analytical

first-order conditions at all if the objective function is specified well.

For the global uniqueness of this optimum, we apply the theorems of concave

programming in A Particular Utility Function for the Social Interaction Model With

Production section to the new expected particular utility function 𝑈 ∗ and constraints. In

this way, our conclusions remain unchanged even when facing heterogeneity.

Our model based on Becker and Murphy (2000) should not permanently lose the

unique global optimum property, different from Brock and Durlauf (1995), even when

32
considering heterogeneity. Thus, it is clear that the heterogeneity does not change our

main conclusion about the existence of unique optimum in the previous section.

Conclusion

We argue for the extension of Becker and Murphy’s (2000) social interaction

model into the simple general equilibrium model with a social multiplier effect based on

Kiley (2003). We call this model the social interaction model with production. Our

particular utility function represents the existence of social capital, which is generated

by human networks, such as the existence of communities and connections among

members of a community. As long as these parameters in our particular utility function

representing social capitals are both positive, the increase of these social capitals will

surely bring positive utility to consumers from the goods in question (Kuniyoshi Saito

suggested the latter two points). However, a trade-off between consumption and leisure

exists.

Thus, the relationships between 𝐴 or 𝐵 and 𝛼 determine the behaviors of

𝑋𝑡 − 𝑋 and 𝐻𝑡 , and the positive parameter 𝐴 or 𝐵 as the horizontal consciousness of

consumption or leisure increases the consumption or the leisure more for each than that

without 𝐴 or 𝐵. However, as we saw, 𝐻𝑡 nonlinearly depends on 𝐴 or 𝐵 and 𝛼,

̅ linearly. If 𝐴 or 𝐵 is too large with 𝛼 being constant, it

although 𝛼 moves 𝐻

33
makes 𝐻𝑡 take the corner solutions mostly. As Figures 1 and 2 show, the parameter 𝐴

and 𝐵 affects the behavior of 𝐻𝑡 inversely, so if 𝐴 and 𝐵 are too large, the effect of

𝐴 might usually dominate that of 𝐵. We ensure these properties even when we set 𝐴 =

0 or 𝐵 = 0.

In Appendix B, we show that the basic behaviors of 𝑋𝑡 − 𝑋 and 𝐻𝑡 are

unchanged, with negative parameters in our particular utility function regarding the

social capital case. However, depending on the size of the parameters, we cannot

generalize our cases in which the desirable stable solution behavior of the model in a

certain range of parameters should exist as in Figure 1 and 2.

As for the price effects, from the previous discussions, we know that the existence

of horizontal consciousness affects the behavior of leisure, which the standard utility

function case does not affect, and adds this further effect to the price effects of the

standard utility function case. This is called the social multiplier effect. However, due to

the lack of empirical information about the concrete parameter setting of our model, we

do not show the welfare analysis of the price effects and measurements of their

magnitudes as the social multipliers, different from Brock and Durlauf (1995).

Therefore, it is our future task to determine the parameters in this utility function

for showing the true behaviors of the equilibrium solutions and its social multiplier

34
effect by active empirical analysis.

Because this model differs from that of Brock and Durlauf (1995), who argued for

the existence of multiple equilibria with a logit, in contrast to their conclusions, we

guarantee the unique global optimum of the social interaction model with production by

our particular utility function satisfying with the strict quasi-concavity and quasi-concave

inequality constraints together with other plausible conditions, even if we consider the

heterogeneity and physical capital accumulation in our model, using existing research

results (e.g., Fuente, 2000; Jehle & Reny, 2001; Nishimura, 1990; Osborne, 2022;

Sundaram, 1996). Although Brock and Durlauf (1995) used the heterogeneous agent

model assuming two types of agents due to the binary choice, heterogeneity is not always

critical to establish the unique global optimum property in our case.

Finally, in our analysis, we assume a symmetric equilibrium in which all

consumers are homogeneous and behave in the same way for convenience at first. As

we saw, this has less essential theoretical meaning, as our heterogeneity result shows

instead, in terms of our interests. However, just as Brock and Durlauf (1995) pursued

the heterogeneous agent model together with their empirical study, in recent years, the

broad field of economics has been accelerating both the theoretical and empirical

emphases on heterogeneity among consumers (e.g., Heckman, 2000).

35
 As Broer et al. (2016) and Kaplan et al. (2018) suggested, the recent

heterogeneous agent models help in treating certain kinds of (theoretical) economic

problems different from our unique global optimum problem, such as inequality and

poverty, which innately respects the heterogeneity of agents in society. We should also

formally and empirically pursue such kinds of future research.

Acknowledgments

We would like to thank Akihiko Kaneko and Kuniyoshi Saito for their valuable

comments on our first Japanese draft of this paper. Additionally, we appreciate the

helpful suggestions from Hideki Konishi for polishing this paper and the anonymous

editor at Scribendi completing the English proofreading and offering comments. The

opinions and views expressed herein belong entirely to the author and do not represent

those of the Bank of Japan and/or Central Council for Financial Services Information.

Any remaining errors solely belong to the author.

Appendix A.

The Physical Capital Accumulation Case

in Our Social Interaction Model With Production

For the case of the physical capital accumulation contribution instead of no physical

capital accumulation contribution in the current production, we can solve our model to

36
set the model variables as steady-state values, such as 𝐶𝑡 = 𝐶 , 𝐼𝑡 = 𝐼 , and 𝐻𝑡 = 𝐻 .

Then, the solutions for the current physical capital (investment) model in the text hold for

these steady-state values 𝐶, 𝐼, and 𝐻 instead of 𝐶𝑡 , 𝐼𝑡 , and 𝐻𝑡 .

Regarding the original solution technique of Kiley (2003) based on Bénassy

(1995) we use in this paper, even in our model with the utility functions 𝑉 and 𝑈, we

should guess that 𝐶𝑡 and 𝐼𝑡 share 𝑌𝑡 with the fixed ratio and 𝐻𝑡 is constant over

time and then verify this guess. However, this guess can hold only under the specific

utility function setting, and even the utility functions 𝑉 and 𝑈 cannot verify this guess

under the case of the usual physical capital accumulation formula.

Initially, a particular utility function 𝑈 satisfies the strict quasi-concavity, and the

inequality (resource) constraints are quasi-concave. This fact suggests that its unique

global optimum is only the solution with the steady-state technique (Sundaram, 1996;

Fuente, 2000). To be more precise, for our model with a particular utility function 𝑈

under the case of the physical capital accumulation, as the usual macroeconomic theory

suggests, we should use the above steady-state solution technique.

However, this technique yields similar solutions and results to those in this paper.

Therefore, we conclude that the question of whether we should consider the physical

capital accumulation is inessential to our analysis in this paper.

37
 With this steady-state technique, our framework with the Karush-Kuhn-Tucker

theorem can easily be extended into the one with Hamiltonian, that is, Lagrangian of the

full intertemporal maximization problem with the physical capital accumulation formula

(without necessarily the perfect depreciation) with adequate modifications of our original

(actually, static) problem, such as adding the discount factor and using the sum of

discounted utilities as the maximized objective instead (see, e.g., Dixit, 1990, for the

mathematical relationship between Lagrangian and Hamiltonian). Briefly, this is because

Hamiltonian is the particular case of the more general Lagrangian.

Regarding this physical capital accumulation case, for example, in the steady-state

technique, we additionally have 𝐾𝐼,𝑡 = 𝐾𝐼,𝑡−1 = 𝐾𝐼 for the physical capital stock

variable under the usual physical capital accumulation formula, such as 𝐾𝐼,𝑡 = 𝐼𝑡 + (1 −

𝛿𝐼 )𝐾𝐼,𝑡−1, where 𝛿𝐼 ∈ [0,1] is the depreciation rate of the physical capital stock, which

becomes the fourth constraint. Because we assume that 𝐼𝑡 and 𝐾𝐼,𝑡−1 (and thus, [1 −

𝛿𝐼 ]𝐾𝐼,𝑡−1 ) have convex domains, 𝐾𝐼,𝑡 (which is the combination, the sum of 𝐼𝑡 and a

proportional 𝐾𝐼,𝑡−1) has a convex domain. Then, 𝐼𝑡 in the combined resource constraint

should be substituted by this physical capital accumulation formula, but this new resource

constraint is also quasi-concave (naturally, we should impose the transversality condition

in this case).

38
 Finally, note that the above steady-state technique should also allow for the case of

social capitals with 𝛿𝑙 ∈ (0,1], 𝑙 = 1,2, instead of the particular case with 𝛿𝑙 = 1, 𝑙 =

1,2, in the text. However, this case is mostly the same as the original case in the text, and

we do not show it because it is trivial. Also, adding this social capital accumulation

formula (see A Particular Utility Function for the Social Interaction Model With

Production section) to our particular utility function does not change its strict quasi-

concavity. Thus, the above steady-state technique does not change our conclusions

regarding the heterogeneous consumer case, as in the previous section.

Appendix B.

The Effects of the Signs of Horizontal Consciousness Parameters 𝑨 and 𝑩

In the text, we only treat the case in which the parameters in our particular utility

function regarding social capitals are both positive. In this appendix, first, we present

Figure A1, illustrating the case when 𝐴 is negative but 𝐵 remains positive. Then,

Figure A2 shows the case when 𝐵 is negative but 𝐴 remains positive. Finally, the

combined complicated case is shown in Figure A3, when 𝐴 and 𝐵 are both negative.

Note that for these figures, the assumption for other parameters is the same as in Figures

1 and 2. MATLAB is used to draw the pictures.

39
 To summarize our conclusions in this appendix, the more significant 𝐻𝑡

becomes, (a) the smaller 𝐴 gets and (b) the more significant 𝐵 gets. (c) As a result, we

have extreme values as zeros or ones (as corner solutions) for 𝐻𝑡 and can hardly

interpret its behaviors when 𝐴 or 𝐵 becomes too small in negative values, similar to

the case with a positive, too significant 𝐴 or 𝐵, although we do not show the

corresponding figures.

Note that in the following figures, we do not show the behaviors of 𝑋𝑡 − 𝑋, in

contrast to Figures 1 and 2. This is because we show the cases of the moderate

parameter values of 𝐴 and 𝐵 that secure the standard (easily interpretable in

economics) behaviors of 𝑋𝑡 − 𝑋 and 𝐻𝑡 in the following figures, and the behaviors of

𝑋𝑡 − 𝑋 are not different from those of the positive 𝐴 and 𝐵 case without showing any

spikes and offer little information.

𝑨 Is Negative (𝑩 Remains Positive)

In this case, 𝐴 = -0.001 for the left and -0.0005 for the right in Figure A1. As

̅ , the smaller 𝐴
shown in the figure, the more significant 𝐻𝑡 becomes compared with 𝐻

gets. Furthermore, extreme values such as zeros or ones are taken as corner solutions for

𝐻𝑡 , and we can hardly interpret its behaviors when 𝐴 gets too small.

Figure A1

40
𝐴 = -0.001 for the Left and -0.0005 for the Right, Given 𝐵 = 0.05

𝑩 Is Negative (𝑨 Remains Positive)

In this case, 𝐵 = -0.50 for the left and -0.25 for the right in Figure A2. As shown

in the figure, the more significant 𝐻𝑡 becomes, the more significant 𝐵 gets.

Furthermore, extreme values such as zeros or ones are taken as corner solutions for 𝐻𝑡 ,

and we can hardly interpret its behaviors when 𝐵 gets too small.

Figure A2

𝐵 = -0.50 for the Left and -0.25 for the Right, Given 𝐴 = 0.0001

41
𝑨 and 𝑩 Are Negative

In this case, as shown in Figure A3, the more significant 𝐻𝑡 becomes, the more

significant 𝐵 gets or the smaller 𝐴 gets, or both.

Figure A3

𝐴 = -0.015 and 𝐵 = -1.000 for the Top Left, 𝐴 = -0.010 and 𝐵 = -1.000 for the Top

Right, 𝐴 = -0.015 and 𝐵 = -0.0001 for the Bottom Right, and 𝐴 = -0.010 and 𝐵 = -

0.0001 for the Bottom Left

This case shows that 𝐴 = -0.015 and 𝐵 = -1.000 for the top left, 𝐴 = -0.010 and 𝐵 =

42
-1.000 for the top right, 𝐴 = -0.015 and 𝐵 = -0.0001 for the bottom left, and 𝐴 = -0.010

and 𝐵 = -0.0001 for the bottom right. As shown in the figure, the more significant 𝐻𝑡

becomes, the more significant 𝐵 gets or the smaller 𝐴 gets, or both. These are the intuitive

results that 𝐻𝑡 becomes more significant when the horizontal consciousness for the leisure

𝐻𝑡 is significant or that for consumption 𝐶𝑡 is small, or both. Interestingly, 𝐻𝑡 is more

̅ when 𝐴 gets smaller and 𝐵 is relatively large, even if these parameters

significant than 𝐻

take negative values, as in the top left, bottom left and right of Figure A3.

Finally, although we do not show the corresponding figures, extreme values such as

zeros or ones are taken as corner solutions for 𝐻𝑡 , and we can hardly interpret its behaviors

when 𝐴 or 𝐵 get too small in negative values.

40
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