This paper analyzes a model in which individuals care about both consumption (intrinsic utility) and social status. Status depends on public perceptions about an individual's predispositions rather than on the individual's actions. However, since predispositions are unobservable, actions signal predispositions and therefore affect status. When status is sufficiently important relative to intrinsic utility, many individuals conform to a rigid standard of behavior, despite heterogeneous intrinsic preferences. When status is relatively unimportant, no conformity emerges. The model produces both customs and fads, and it suggests an explanation for the development of multiple subcultures with distinct norms. Copyright 1994 by University of Chicago Press.
B. Douglas Bernheim (Sat,) studied this question.