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The relative income hypothesis

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  • Alvarez-Cuadrado, Francisco
  • Van Long, Ngo

Abstract

Despite its theoretical dominance, the empirical case in favor of the permanent income hypothesis is weak. Contrary to one of its basic implications, a growing body of evidence suggests that rich households save a higher proportion of their permanent income than poor households. We propose an overlapping-generations economy where households care about relative consumption. As a result, an individual's consumption is driven by the comparison of his lifetime income and the lifetime income of his reference group; a permanent income version of Duesenberry's (1949) relative income hypothesis. Across households the savings rate increases with income while aggregate savings are independent of the income distribution.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 35 (2011)
Issue (Month): 9 (September)
Pages: 1489-1501

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Handle: RePEc:eee:dyncon:v:35:y:2011:i:9:p:1489-1501

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Keywords: Interpersonal comparisons Relative income hypothesis Permanent income hypothesis;

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Citations

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Cited by:
  1. Fares Al-Hussami & Álvaro Martín Remesal, 2012. "Current Account Imbalances and Income Inequality: Theory and Evidence," Kiel Advanced Studies Working Papers 459, Kiel Institute for the World Economy.
  2. Georgarakos, Dimitris & Haliassos, Michael & Pasini, Giacomo, 2012. "Household debt and social interactions," CFS Working Paper Series 2012/05, Center for Financial Studies (CFS).
  3. Moritz Drechsel-Grau & Kai D. Schmid, 2013. "Consumption-Savings Decisions under Upward Looking Comparisons: Evidence from Germany, 2002-2011," SOEPpapers on Multidisciplinary Panel Data Research 594, DIW Berlin, The German Socio-Economic Panel (SOEP).
  4. Sweet, Elizabeth & Nandi, Arijit & Adam, Emma K. & McDade, Thomas W., 2013. "The high price of debt: Household financial debt and its impact on mental and physical health," Social Science & Medicine, Elsevier, vol. 91(C), pages 94-100.
  5. Yun Kim & Mark Setterfield & Yuan Mei, 2013. "A Theory of Aggregate Consumption," Working Papers 1301, Trinity College, Department of Economics.
  6. Alimi, R. Santos, 2013. "Keynes' Absolute Income Hypothesis and Kuznets Paradox," MPRA Paper 49310, University Library of Munich, Germany.

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