Consumption-Savings Decisions Under Upward-Looking Comparisons

We demonstrate that upward-looking comparisons induce "keeping up with the richer Joneses"-behavior. Using data from the German Socio-Economic Panel, we estimate the effect of 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 as well as unobserved individual and local area heterogeneity, an increase in reference consumption of 100 euros leads to an increase in consumption of up to 23 euros depending on the household's position in the income distribution. Our findings suggest that changing income inequality can have significant macroeconomic effects.