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Consumption-Savings Decisions under Upward Looking Comparisons: Evidence from Germany, 2002-2011

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  • Moritz Drechsel-Grau
  • Kai D. Schmid

Abstract

We demonstrate that interpersonal comparisons lead to "keeping up with the Joneses"-behavior. Using annual household data from the German Socio-Economic Panel, we estimate the causal effect of changes in reference consumption, defined as the consumption level of all households who are perceived to be richer, on household savings and consumption. When controlling for own income, an increase in reference consumption of 100 euros leads to an increase in consumption of 10 to 25 euros. Upper middle class households are most strongly affected. Our findings provide valuable input for macroeconomic models that consider the economic consequences of interdependent preferences.

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Bibliographic Info

Paper provided by DIW Berlin, The German Socio-Economic Panel (SOEP) in its series SOEPpapers on Multidisciplinary Panel Data Research with number 594.

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Length: 38 p.
Date of creation: 2013
Date of revision:
Handle: RePEc:diw:diwsop:diw_sp594

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Keywords: Household Savings; Household Consumption; Reference Consumption; Interdependent Preferences; Relative Income Hypothesis; Income Inequality;

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References

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Cited by:
  1. Klos, Alexander & Rottke, Simon, 2013. "Saving and Consumption When Children Move Out," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79786, Verein für Socialpolitik / German Economic Association.
  2. Kai D. Schmid & Moritz Drechsel-Grau, 2013. "Habits and Envy: What Drives the Consumption Behavior of U.S. Households? Evidence from PSID, 1999-2009," IMK Working Paper 123-2013, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.

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