Across income groups and countries, individual citizens perceive economic inequality spectacularly wrong. These misperceptions have far-reaching consequences, as it might be perceived inequality, not actual inequality informing redistributive preferences. The prevalence of this phenomenon is independent of social class and welfare regime, which suggests the existence of a common mechanism behind public perceptions. The literature has identified several stylised facts on how individual perceptions respond to actual inequality and how these biases vary systematically along the income distribution. We propose a network-based explanation of perceived inequality building on recent advances in random geometric graph theory. The generating mechanism can replicate all of aforementioned stylised facts simultaneously. It also produces social networks that exhibit salient features of real-world networks; namely, they cannot be statistically distinguished from small-world networks, testifying to the robustness of our approach. Our results, therefore, suggest that homophilic segregation is a promising candidate to explain inequality perceptions with strong implications for theories of consumption and voting behaviour.

The study of emulative consumption norms has generated a vast array of literature, and was recently linked to a diverse set of issues such as financial fragility, persistently high working hours and indebtedness. Modeling these interactions has yet remained elusive since everyday social interactions are far from random with models, thus requiring to specify the underlying network structure.

We provide a full-fledged macroeconomic Agent-Based Model with heterogeneous agents and explicit socioeconomic interactions as a testing ground for different policy measures such as minimum wages, financial regulation and collective bargaining. On the micro-level, the consumption model generates distributions of disposable income and consumption expenditures that are in line with empirical data. This model features upward-looking individual consumption that focuses on one’s personal social contacts. These contacts come from a network governed by homophily in income, i.e., individuals connecting likely to those others with similar incomes, and hence feature socio-economic segregation. The SFC framework ensures that all stocks and flows within the model are accounted for and can in principle, be compared to national accounting for further validation