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The Relative Income Hypothesis

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  • Francisco Alvarez-Cuadrado
  • Ngo Van Long

Abstract

We propose an overlapping generations economy where households care about relative consumption, the difference between their consumption and the consumption of their reference group. An individual's consumption is driven by the comparison of his lifetime income and the lifetime income of his reference group; hence the paper offers a permanent income version of the Duesenberry's relative income hypothesis. Across households the saving ratio increases with income while aggregate saving is independent of the income distribution. Positional concerns lead agents to over-consume, over-work and under-save. We propose a simple tax schedule that induces the competitive economy to achieve the efficient allocation. Nous proposons une économie caractérisée par des générations imbriquées et des ménages qui accordent une importance à la consommation relative, soit la différence entre leur consommation et celle de leur groupe de référence. Les habitudes de consommation d'un individu sont dictées par la comparaison du revenu qu'il gagnera au cours de sa vie avec celui de son groupe de référence. Le document offre ainsi une version de l'hypothèse du revenu relatif avancée par Duesenberry qui tient compte du revenu permanent. Dans l'ensemble des ménages, le ratio d'épargne augmente en fonction du revenu, mais l'épargne globale est indépendante de la répartition du revenu. Les préoccupations des agents concernant leur position incitent ces derniers à consommer et à travailler de façon excessive et à épargner insuffisamment. Nous proposons un programme d'imposition qui encourage l'économie concurrentielle à atteindre une répartition efficiente.

Suggested Citation

  • Francisco Alvarez-Cuadrado & Ngo Van Long, 2008. "The Relative Income Hypothesis," CIRANO Working Papers 2008s-18, CIRANO.
  • Handle: RePEc:cir:cirwor:2008s-18
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    Cited by:

    1. Petach, Luke & Tavani, Daniele, 2017. "Keeping up with the Joneses: Other-regarding Preferences and Endogenous Growth," EconStor Preprints 169416, ZBW - Leibniz Information Centre for Economics.
    2. Francisco Alvarez-Cuadrado & Jose Maria Casado & Jose Maria Labeaga, 2016. "Envy and Habits: Panel Data Estimates of Interdependent Preferences," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 78(4), pages 443-469, August.
    3. 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.
    4. Barnett, Richard & Bhattacharya, Joydeep & Bunzel, Helle, 2016. "The Fight-or-Flight Response to the Joneses," School of Economics Working Paper Series 2016-12, LeBow College of Business, Drexel University.
    5. Dimitris Georgarakos & Michael Haliassos & Giacomo Pasini, 2014. "Household Debt and Social Interactions," Review of Financial Studies, Society for Financial Studies, vol. 27(5), pages 1404-1433.
    6. 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).
    7. Prante, Franz J., 2017. "Macroeconomic effects of personal and functional income inequality: Theory and empirical evidence for the US and Germany," IPE Working Papers 83/2017, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
    8. Josephine Jacobs & Courtney Van Houtven & Audrey Laporte & Peter Coyte, 2014. "The Impact of Informal Caregiving Intensity on Women's Retirement in the United States," Working Papers 140008, Canadian Centre for Health Economics.
    9. Kazuo Mino & Yasuhiro Nakamoto, 2016. "Heterogeneous conformism and wealth distribution in a neoclassical growth model," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 62(4), pages 689-717, October.
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    12. Petri Böckerman & Jani-Petri Laamanen & Esa Palosaari, 2016. "The Role of Social Ties in Explaining Heterogeneity in the Association Between Economic Growth and Subjective Well-Being," Journal of Happiness Studies, Springer, vol. 17(6), pages 2457-2479, December.
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    15. Luke Petach & Daniele Tavani, 2018. "Income shares, secular stagnation, and the long-run distribution of wealth," FMM Working Paper 25-2018, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    16. Drechsel-Grau, Moritz & Schmid, Kai D., 2014. "Consumption–savings decisions under upward-looking comparisons," Journal of Economic Behavior & Organization, Elsevier, vol. 106(C), pages 254-268.
    17. Kazuo MIno & Yasuhiro Nakamoto, 2014. "Conformism and Wealth Distribution," KIER Working Papers 901, Kyoto University, Institute of Economic Research.
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    Keywords

    relative consumption; relative income hypothesis; permanent income hypothesis; consommation relative; hypothèse du revenu relatif; hypothèse du revenu permanent;

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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